AGRICULTURAL LENDING: A How-To Guide Foreign Affairs, Trade and Affaires étrangères, Commerce Development Canada et Desveloppement Canada Disclaimer Agricultural Lending: A How - To Guide Disclaimer FC, a member of the World Bank Group, creates opportunity for people to I escape poverty and improve their lives. We foster sustainable economic growth in developing countries by suppor^ng private sector development, mobilizing private capital, and providing advisory and risk mi^ga^on services to businesses and governments. This report was commissioned by IFC through its Agricultural Finance and PostTHarvest Handling Program in Vietnam, funded by the CanadaTDepartment of Foreign ALairs, Trade and Development (DFATD) and IFC, which is aimed to improve sustainable rural growth in Vietnam. The conclusions and judgments contained in this report should not be a2ributed to, and do not necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Execu^ve Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publica^on and accept no responsibility for any consequences of their use. -i- Acknowledgements Agricultural Lending: A How - To Guide Acknowledgements his report, “Agricultural Lending: A How(To Guide,” was developed as part of T IFC Agricultural Finance and PostTHarvest Handling Program in Vietnam, funded by the CanadaTDepartment of Foreign ALairs, Trade and Development (DFATD) and IFC. The overall goal of this mul^Tyear program is to improve sustainable rural growth in Vietnam, leading to an increased net income of USD 36.6 million for farmers by 2019. SpeciUcally on agricultural Unancing, the program aims to support Unancial ins^tu^ons in building capacity in order to expand Unancing to the agricultural sector, to farmers and value chain players. The report was prepared under the overall guidance of Rachel Freeman, IFC Asia Manager for Financial Ins^tu^ons Group Advisory Services. We acknowledge the signiUcant contribu^ons of Hans Dellien, IFC Regional AgriUnance Specialist for East Asia and PaciUc, the main author of the report, and Patrick Starr from Connexus Corpora^on, who has been commissioned by IFC to carry out the desk research, dra-ing and case study analysis. We would like to thank Kyle F Kelhofer, IFC Country Manager for Vietnam, Cambodia and Lao PDR for his review. Thanks to peer reviewers for their invaluable technical advice and comments: Calvin Miller from FAO, Maria Pagura and Juan Buchenau from the World Bank, and Panos Varangis, Huong Mai Huynh and Hang Thi Thu Nguyen from IFC. We would like to thank IFC agriculture project team members and the many individuals and organiza^ons that contributed to the research and study through interviews before, including the farmers, traders and processors who took part in the research. Our apprecia^on to Deviah Machimanda Appaiah for edi^ng this report, and Anh Van Thi Chu for her help with the design of the report. Vietnam 2015 - iii - Agricultural Lending: A How - To Guide Table of Contents TABLE OF FIGURES ...................................................................................................vii TABLE OF TABLES .....................................................................................................viii LIST OF ABBREVIATIONS ..........................................................................................ix OVERVIEW ..................................................................................................................1 Introduc^on ....................................................................................................1 Summary of Content ......................................................................................1 Target Audience..............................................................................................2 Addi^onal Informa^on ...................................................................................3 INTRODUCTION TO AGRICULTURAL FINANCE .......................................................5 What is Agricultural Finance?.........................................................................5 Agricultural Finance Market Opportunity ......................................................6 Risks of Agricultural Finance and Mi^ga^on Strategies .................................9 Models of Agricultural Finance.....................................................................12 Factors In.uencing the Introduc^on of Agricultural Finance.......................15 Ins^tu^onal Capabili^es ...............................................................................16 Checklist........................................................................................................17 THE PRODUCT DEVELOPMENT PROCESS ..............................................................19 Introduc^on to the Five-Phase Model .........................................................19 Timeline for Introducing Agricultural Lending Products ..............................20 Structure of Team and Leadership................................................................20 Resources and Timing...................................................................................21 Checklist........................................................................................................21 PRODUCT DEVELOPMENT PHASE 1 - PREPARATION ...........................................23 Iden^fy Ins^tu^onal Gaps ............................................................................23 Management Informa^on Systems (MIS) Requirements.............................26 Build Internal Leadership Team ....................................................................27 - iv - TAL6 + C+)T6)T Prepare for Implementa^on .........................................................................28 Challenges and Lessons Learned ..................................................................29 Checklist........................................................................................................29 PRODUCT DEVELOPMENT PHASE 2 - MARKET RESEARCH ..................................31 Selec^on of Regions with High Agricultural Poten^al..................................32 Evaluate Target Clients .................................................................................34 Compe^^ve Landscape Analysis ..................................................................41 Go-No Go......................................................................................................42 Strategy Development for Pilot Phase..........................................................44 Challenges and Lessons Learned ..................................................................44 Checklist........................................................................................................44 PRODUCT DEVELOPMENT PHASE 3 - PILOT DESIGN............................................47 Product Term Sheet ......................................................................................48 Agricultural Lending Methodology...............................................................50 Key Business Strategies for Agricultural Finance..........................................54 Marke^ng Agricultural Lending Products.....................................................55 Performance Metrics ....................................................................................56 Key StaL Capabili^es ....................................................................................56 Agricultural Lending StaL Training ...............................................................57 Checklist........................................................................................................59 PRODUCT DEVELOPMENT PHASE 4 - PILOT TESTING AND MONITORING ........61 Agricultural Lending Process ........................................................................61 Tracking Performance Metrics......................................................................64 Challenges and Lessons Learned ..................................................................65 Checklist........................................................................................................67 -v- TAL6 + C+)T6)T PRODUCT DEVELOPMENT PHASE 5 - PRODUCT LAUNCH AND ROLLOUT .........69 Strategy Development for the Rollout Phase ...............................................69 Seng Up an Agricultural Lending Unit .......................................................72 Developing an Implementa^on Plan ............................................................73 Arrears Monitoring .......................................................................................74 Summary Case Study....................................................................................75 Challenges and Lessons Learned ..................................................................77 Checklist........................................................................................................78 CONCLUSION ............................................................................................................81 APPENDIX Appendix A - Addi^onal Risks.......................................................................82 Appendix B - Hybrid and Structured Financing Models ...............................83 Appendix C - Financial and Governmental Policies A Lec^ng Agricultural Lending ................................................................87 Appendix D - Ins^tu^onal Diagnos^c ...........................................................90 Appendix E - Sample Producer Segmenta^on Interview Form ....................96 Appendix F - Compe^^ve Posi^on Analysis ...............................................103 Appendix G - Farmer Segmenta^on Analysis .............................................104 Appendix H - Loan Appraisal Forms and Expert Score Variables ...............109 Appendix I - Sample Performance Reports ................................................120 SELECTED BIBLIOGRAPHY .....................................................................................122 - vi - TAL6 + IG ,6 Table of igures Figure 1 Components of Introducing Agricultural Lending...................................3 Figure 2 Basic Value Chain Map ...........................................................................6 Figure 3 Corn, Wheat, Rice and Beef, Commodi^es Indexes 1980T2013 .............7 Figure 4 Risks along the Value Chain ....................................................................9 Figure 5 Integrated Risk Structure: The Farmer's Perspec^ve..............................9 Figure 6 Appropriate Financing Models by Value Chain and Enterprise Risk Levels ...........................................................................13 Figure 7 Product Development Process .............................................................20 Figure 8 Phase 1 – Prepara^on...........................................................................23 Figure 9 Phase 2 – Market Research ..................................................................31 Figure 10 Phase 3 – Pilot Design ..........................................................................48 Figure 11 Phase 4 – Pilot Tes^ng and Monitoring ................................................61 Figure 12 Lending Process for Agricultural Clients ...............................................63 Figure 13 Phase 5 – Product Launch and Rollout .................................................69 Figure 14 Growth of the FI's Agricultural Lending Por1olio 2010T14 ...................76 - vii - TAL6 + TAL6 Table of Tables Table 1 Key Agricultural Risks and Mi^ga^on Strategies ....................................10 Table 2 Sample Gap Analysis...............................................................................24 Table 3 Variables to Analyze When Researching a Region's Agricultural Poten^al ...............................................................32 Table 4 CoLee Producer ProUles in Central Highlands........................................36 Table 5 Total Assets and Last 12 Months Farm and Family Income $ ...............36 Table 6 Financing Needs for CoLee Farmers in Central Highlands......................38 Table 7 Farmer Risk ProUles of Central Highlands...............................................40 Table 8 Es^mated Por1olio Size for Central Highlands .......................................40 Table 9 Variables to Consider when Researching Compe^tors' Products............................................................................41 Table 10 Projected LO Produc^vity During Pilot ...................................................43 Table 11 Projected Outstanding Loans and Por1olio Size of Pilot ........................43 Table 12 Term Sheet Format .................................................................................48 Table 13 Financing Models in the Mekong Delta..................................................71 Table 14 Agricultural Risks and Mi^ga^on Strategies ...........................................82 Table 15 Financial Policies and Their Impacts on FIs ............................................87 Table 16 Government Policies and Their Impacts on FIs ......................................88 - viii - LIT + A,6IATI+) List of Abbreviations CC Credit commi2ee FI Financial ins^tu^on GDP Gross domes^c product GPS Global posi^oning system HA Hectares HR Human resources IFC Interna^onal Finance Corpora^on IT Informa^on technology MFI MicroUnance ins^tu^on MIS Management informa^on systems NGO NonTgovernmental organiza^on PAR Por1olio at risk SME Small and medium enterprises USAID United States Agency for Interna^onal Development WB World Bank - ix - Overview +6,I6 +verview INTRODUCTION clients. The development of .exible and easily replicable structures for marke^ng, delivering, griculture is the main source of income A and employment for the 70 percent of and monitoring Unancial products is cri^cal to the sustainability of an ins^tu^on’s agricultural the world's poor, who live in rural areas. Unance expansion. Yet, only 10 percent of gross domes^c produce (GDP) in low and middleTincome countries is generated by the agricultural sector1. This SUMMARY OF CONTENT results in the severe mismatch between the This toolkit introduces and explains step by propor^on of people employed by the agriculT step the key elements of success for FIs to ture sector and the propor^on of GDP a2ribT expand Unancial services to farmers. The utable to agricultural produc^on. In developing content was developed around IFC’s global countries, most actors in the agricultural sector experience in assis^ng FIs with the developT are smallTscale agricultural producers and ment and implementa^on of agricultural small, nonTfarm entrepreneurs involved in a Unance products. The beneUts of this work are variety of microenterprises with diversiUed, yet synthesized in this guide, along with knowlT limited income sources. A majority of these edge and exper^se of best prac^ces among households have li2le or no access to formal both IFC clients and others. The guide includes Unancial ins^tu^ons or adequate Unancial advice on each step involved and ^ps on how services. Due to this lack of access, most rural to address the complex challenges that might poor and lowTincome households rely on costly arise during product development process. informal sources of Unance (for example, input supplier credit, trader credit, or self('nancing). The guide has seven chief components: None of these allow them to take full advantage of economic opportuni^es. FinanT 1. IntroducCon to Agricultural Finance: This cial ins^tu^ons FIs , such as commercial banks sec^on introduces agricultural Unance and and microUnance ins^tu^ons, can Ull an imporT iden^Ues the common risks in agricultural tant Unancing gap by expanding opera^ons produc^on that may impact client repayT into rural areas to serve the needs of this large ment capacity. sector. 2. The Product Development Process: This Research conducted by IFC shows that FIs in sec^on introduces the product developT emerging markets resist lending to agricultural ment process and how an ins^tu^on could enterprises for two main reasons: lack of best posi^on itself for sustainable success exper^se and familiarity with the needs of the in rural markets. agricultural sector and lack of tailored products 3. Product Development Phase 1 ( PreparaCon: and processes to respond to its needs2. The Urst step in the product development Addi^onally, a major challenge in servicing process involves iden^fying gaps in an FI’s rural clients is that they are o-en physically dispersed across large geographical regions, posing addi^onal costs and logis^cal issues. 1 World Development Indicators, 2014 by World Bank. Thus, distribu^on channels must be costTeLecT 2 Scaling Up Access to Finance for Agricultural SMEs Policy ^ve and convenient for both ins^tu^ons and Review and Recommenda6ons, IFC 2011. -1- Agricultural Lending: A How - To Guide processes, lending policies, loan appraisal Using IFC’s interna^onal experience, this guide forms, and determining op^mal delivery focuses in great detail on the development of mechanisms for launching new products in new products targeted at farmers and the rural areas. adjustments FIs must make to be2er engage with them and directly Unance commercial 4. Product Development Phase 2 ( Market farmers. It discusses other Unancing strategies Research: The second step in the product such as value chain Unance, which could be development process involves understandT employed to reach the agricultural sector. This ing new clientele characteris^cs, market guide brie.y discusses these models and dynamics, es^mated crop volumes men^ons resources for further informa^on. produced, seasonality of incomes, crop diversiUca^on strategies and Unancing needs by sector and size of farmer. TARGET AUDIENCE This guide seeks to inform change agents 5. Product Development Phase 3 ( Pilot working with or within Unancial ins^tu^ons Design: The third step involves dra-ing interested in introducing new agricultural ini^al features and characteris^cs of new lending products for farmers. This audience products, developing a business plan for includes innova^on oCcers at Unancial the pilot phase, deUning and seng ins^tu^ons, Unancial inclusion specialists at success metrics, and extensive training mul^lateral banks, or technical assistance (theore6cal and 'eld(based training) for providers. The guide’s goal is to provide a loan oCcers. resource for development professionals and Unancial prac^^oners alike to understand 6. Product Development Phase 4 ( Pilot opportuni^es, risks, and processes for develT TesCng and Monitoring: The fourth step oping new products for agricultural lending. involves monitoring the pilot’s opera^onal Senior managers in Unancial ins^tu^ons will performance, quality of the risk analysis, Und the Urst two introductory sec^ons most produc^vity of loan oCcers, and eLec^veT useful to understand the agricultural lending ness of marke^ng strategies. Also, assessT landscape. Technical assistance providers ment of how it is received and used by working with Unancial ins^tu^ons to introduce target clientele. The third and fourth new products will Und descrip^ons of each of phases are itera^ve. Depending on how the Uve phases more applicable in their work. the pilot rates on the preTdetermined success metrics from phase 3, the product Providing Unancial services to the agricultural may need to return to phase 3 to be sector is a complex and challenging endeavor. adjusted and rolled out again. Financial ins^tu^ons need to understand the agricultural sector and the characteris^cs and 7. Product Development Phase 5 ( Product Unancing needs of target clients. They also Launch and Rollout: How to design and must adjust their systems, human resources, plan the rollout of the product, ensuring and ins^tu^onal culture to be successful. This that the FI has all the resources (human guide provides an integrated approach to and 'nancial) for a gradual release, making understanding and managing the pieces and the new product available to the whole processes of ins^tu^onal change to engage market. with this new sector. It is important to emphaT size, that this guide requires the support of This guide highlights case studies and success technical assistance providers to work with stories from around the globe to illustrate how Unancial ins^tu^ons in building up the other ins^tu^ons already work within the processes and capacity to sustainably agricultural sector. Look for these case studies introduce agricultural lending. in blue text boxes. -2- +6,I6 Figure 1  Components of Introducing Agricultural Lending Personnel Performance Management Metrics This guide will not focus on some of the more channels and increase cost eCciencies of complicated aspects of seng up sustainable Unancial transac^ons in rural areas. While Unancing models in rural areas, such as how to these areas will be men^oned periodically crossTsell Unancial services to the rural sector, throughout the document, the focus will how to build strategic alliances with value remain on seng up the processes necessary chain players to increase outreach, or how to to lend directly to farmers in rural areas. use new technology to improve distribu^on ADDITIONAL INFORMATION For addi^onal informa^on, please visit IFC’s website (www.ifc.org), or contact the IFC AgriUnance team. IFC is willing to discuss possible advice and support for customiza^on and applica^on of this Agricultural Lending: A HowTtoTGuide with interested Unancial ins^tu^ons to adapt to their respec^ve requirements and opera^onal context. Please contact: IFC Hans Dellien, Regional Agrinance Specialist Huong Mai Huynh, Opera5ons Ocer Financial Ins^tu^ons Group, Financial Ins^tu^ons Group, East Asia & PaciUc East Asia & PaciUc Indonesia Stock Exchange Building, Tower 2, 9th Floor 63 Ly Thai To Str., Hoan Kiem Dist. Jl. Jend. Sudirman Kav. 52T53, Jakarta 12190, Indonesia Hanoi, Vietnam Phone: +62T2129948068 Phone: +84T4T38247892 Email: hdellien@ifc.org Email: hhuong1@ifc.org -3- Introduction to Agricultural Finance I)T,+D CTI+) T+ AG,IC LT ,AL I)A)C6 Introduction to Agricultural inance here are some unique industry risks WHAT IS AGRICULTURAL T associated with lending to the agriculT FINANCE? tural sector. However, there are important market opportuni^es wai^ng for FIs Agricultural Unance is a sectorial concept that that make the ini^al investment to adapt comprises Unancial services for agricultural products to meet the needs of new clients in produc^on, processing, and marke^ng. It this industry. Some key issues FIs should includes short, medium, and longTterm loans, consider as they inves^gate this space are: leasing, savings, payment services, and crop and livestock insurance. This guide focuses on • The main challenges when expanding Unancing agricultural businesses, primarily Unancial services into rural areas? small and medium farmers, who tend to be located in rural areas. Providing services to • The biggest risks in agricultural Unance in these types of clients spread out in rural areas the target country or region? can increase transac^on costs. This guide talks about how to strategically address these • The type of farmers and ac^vi^es to be speciUc issues. The concept of agricultural Unanced? value chain Unance emphasizes the ver^cal dimension of agricultural Unance between • The value chain players and how to collabT diLerent segments of agricultural value orate with or support them? chains3. FIs must look at agricultural Unance • The skills and human resource competenT holis^cally; as the full range of ac^vi^es cies required to lend in rural areas? involved in geng a product or service through diLerent phases of produc^on and delivery to • Best prac^ces to assess credit risks of the Unal consumer. This can help FIs keep a farmers and agribusinesses? marketToriented view to target produc^ve investments in areas that need them most. • Delivery channels that are more eLec^ve Further, approaching agricultural Unance from in rural areas? a value chain perspec^ve allows FIs to provide a wider range of products to a wider range of • The best strategy to oLer proUtable actors beyond farmers and producers who may services in rural areas? be more geographically dispersed and harder This guide looks at these issues in a structured to reach. and systema^c manner. 3 Scaling Up Access to Finance for Agricultural SMEs Policy Review and Recommenda6ons. IFC 2011.. -5- Agricultural Lending: A How - To Guide Figure 2 – Basic Value Chain Map Global Trading Environment Global Retailers NaƟonal Enabling Environment NaƟonal Retailers Sector-SpeciĮc Exporters Wholesalers Providers Cross-Cuƫng Processors Providers Producers x Financial Providers Input Suppliers To visualize what a basic value chain might look can more easily iden^fy gaps in Unancing and like, see Figure 2. It shows a simple value chain evaluate poten^al opportuni^es with greater of producers using inputs from suppliers, and ease. These maps help investors understand then selling raw goods to processors, who in and visualize where there might be a weak link turn sell the Unal product to wholesalers or in the chain and why that weakness exists. This exporters, depending on whether the product ensures that the right type of funding .ows to is for domes^c or interna^onal markets. On the the areas that need it most. le-, Unancial providers (banks, micro'nance ins6tu6ons, etc.), crossTcung service AGRICULTURAL FINANCE MAR- providers (transporters, warehouse operators, etc.) and sectorTspeciUc providers (trade asso( KET OPPORTUNITY cia6ons, extension services, etc.) oLer cri^cal Total GDP of low and middleTincome countries technical support and Unancing to the value is es^mated at $24.6 trillion, with the agriculT chain. The success and strength of the value tural sector represen^ng nearly $2.5 trillion.4 chain and of the Unancing itself depend on the Further, by 2050, the world will need to feed enabling environment (local and interna6onal more than nine billion people, requiring nearly government policies, legal environment, etc.). 70 percent more food than we consume For example, high export taxes for a speciUc today.5 product or cumbersome export formali^es could seriously cripple the poten^al of the en^re value chain. By construc^ng a map for poten^al value chain 4 World Development Indicators 2014 by WB. investments, such as the one in Ugure 2, FIs 5 Global Agriculture Towards 2050, UN Food and Agriculture Organiza6on, 2009, fao.org. -6- I)T,+D CTI+) T+ AG,IC LT ,AL I)A)C6 Figure 3 – Corn, Wheat, Rice and Beef, Commodi5es Indexes 19802013 nominal price index, 100 = January 1980 350 300 Com 250 200 Wheat 150 Rice Beef 100 50 0 1980 1990 2000 2010 2013 Source: InternaƟonnal Monetary Fund; UN Comtrade, UN Conference on Trade and Development; World Bank; McKinsey Global InsƟtute analysis A study by McKinsey & Company says prices of sustainably. Financial ins^tu^ons should introT staple crops, such as corn, wheat and rice, in duce interes^ng Unancing products to support addi^on to meats, such as beef, have been this more dynamic rural context. increasing over the past ten years.6 Prices are likely to con^nue to increase because of higher The rela^vely low penetra^on of Unancial global demand for food and increased demand ins^tu^ons into rural areas indicates a large for higher quality food by growing middle business opportunity. According to Findex data, classes in developing countries (see Figure 3). only 8 percent of adults in rural areas in develT oping countries have borrowed from formal This means larger quan^^es of food will need Unancial ins^tu^ons and only 48 percent have to be produced more eCciently with smaller bank accounts.7 Further, according to World quan^^es of inputs. The global trend of rising Bank surveys, 28.7 percent of Urms in all counT crop prices is having a posi^ve impact on rural tries listed “lack of access to 'nance” as the economies, genera^ng higher incomes and biggest obstacle to their businesses. This more opportuni^es to invest. Also, the increase number rises in low and middleTincome of extreme weather events in the world’s countries, where agriculture is a larger part of important agricultural regions is forcing the economy. For instance, in subTSaharan farmers to adapt, which can lead to disrup^ons Africa, 40.8 percent of Urms listed “lack of in previously stable agricultural value chains. The demand and price increases, as well as changes in consumer demographics, will increase the need to produce more food. 6 N. Denis, D. Fiocco, J. Oppenheim. From liability to oppor( Farmers will need to invest in new technologies tunity: How to build food security and nourish growth,” and rural infrastructure to produce more March 2015. 7 World Bank Global Financial Inclusion Database. 2014. -7- Agricultural Lending: A How - To Guide access to 'nance” as their biggest obstacle8. to a comprehensive range of Unancial services Given the large propor^on of businesses in the remains a signiUcant challenge for farmers in agricultural sector in these developing markets, developing countries. Some countries have these numbers present an en^cing market started addressing this issue by to coordina^ng opportunity for FIs exploring entry into the eLorts between public and private sectors to agricultural sector. Access to Unancial services improve the supply of Unancial services, is cri^cal for providing funds for farm investT technologies, and access to markets for small ments in produc^vity, improving postTharvest farmers. The box below summarizes some of prac^ces, smoothing household cash .ow, the work led by government and private sector enabling be2er access to markets, and promotT in Vietnam. ing be2er risk management. However, access Public(Private Partnerships Focus on Sustainable Agriculture in Vietnam9 The PublicTPrivate Task Force on Sustainable Agriculture in Vietnam was formed in May 2010 at the World Economic Forum on East Asia in Ho Chi Minh City. CoTchaired by the Minister of Agriculture and Rural Development, the task force comprises 17 global and four local companies, two provincial governments, a na^onal research ins^tute, two interna^onal organiza^ons, and Uve NGOs. The mul^Tstakeholder partnership focuses on Uve crops (coee, corn, soybean, tea, and fruits and vegetables) deUned as strategic priori^es in Vietnam’s na^onal plan, and has mobilized working groups and pilots for each. In November 2011, the Government of Vietnam ra^Ued adop^on of the World Economic Forum’s New Vision for Agriculture (NVA) framework into the country’s 10Tyear na^onal agriculture strategy, integra^ng a new dimension of environmental sustainability into Vietnam’s longTterm aspira^ons. "Government and business share the same goal: we both want to see strong and sustainable growth in Vietnam’s agriculture sector," said Cao Duc Phat, Minister of Agriculture and Rural Development. "We have iden6'ed a number of ways in which we can work together more eec6vely towards that goal." "Growing Asian demand for food means we must increase both produc6on and quality to meet that growth while opera6ng within the constraints of climate change. If companies combine eorts with the government and each other, we can operate more eec6vely along the full value chain," said Frans Muller, Member of the Management Board, METRO Group and CoTChair, World Economic Forum on East Asia.10 The government has placed a high priority on industrializa^on and moderniza^on of rural agriculture, seng a target of 3.5 percent annual growth in the sector un^l 2020. Private sector investment is seen as cri^cal to achieving that target. Par^cipa^ng companies include Archer Daniels Midland (ADM), Bunge, Cargill, Dupont, METRO Group, Monsanto, Nestlé, PepsiCo, Swiss Re, Syngenta, Unilever, and Yara Interna^onal. 8 World Bank Enterprise Surveys. 2014. 9 Grow Asia. World Economic Forum. October 2014. 10 “Agriculture in Vietnam gets a boost with new public(private sector project.” World Economic Forum. 2010. -8- I)T,+D CTI+) T+ AG,IC LT ,AL I)A)C6 RISKS OF AGRICULTURAL Of all the actors in the value chain, it is most FINANCE AND MITIGATION frequently farmers and rural small and medium enterprises (SMEs) that lack access to approT STRATEGIES priate Unancial products. FIs that target The rela^ve size of the agriculture industry in agricultural SMEs face a variety of challenges, the developing world, combined with such as understanding cash .ows of rural projected growth es^mates, makes this market households and business cycles of small farms an a2rac^ve opportunity for FIs looking to and es^ma^ng repayment capaci^es of small Unance growthToriented agricultural enterT farmers (who in many cases lack formal prises. So why are FIs not .ooding the market accoun6ng systems). FIs must assemble deT with products and services? Perhaps the tailed business proUles of poten^al farmer biggest barrier for FIs to overcome is the clients and also have a good understanding of perceived high level of risk that the ins^tu^on risks that farmers face. Figure 5 illustrates would need to take on as a result of building a primary categories of risks faced by rural new por1olio in the agricultural sector. As can farmers including business risks related to be seen in Ugure 4 below, the risks are not just produc^on, climate, investments, inputs, and concentrated at the producer level of the value the market. While these are some chief risks, chain as one might expect but are prevalent at this list is not exhaus^ve. Some addi^onal risks all levels. Agriculture is an inherently risky are listed in Appendix A – Addi^onal Risks. FIs industry, and risks faced by actors in the value must consider all of these risks when developT chain ul^mately translate into risks that FIs ing an agricultural lending strategy and deterT must take into account when evalua^ng mining which segments will build the strongest proUtability of an investment opportunity. por1olios. However, just as with any new target industry, building an understanding of key na^onal Figure 4 – Risks along the Value Chain players, value chains, and regula^ons can go a long way in helping FIs counteract and mi^gate Input Producers Transporters Processors Retailers Suppliers risks. In fact, many of the risks enumerated in Quality ProducƟon Infrastructure Technology Infrastructure Figure 4 are encountered in other industries, Regulatory Availability Price Quality control Storage so this guide will help interpret how some Infrastructure OrganizaƟon Technology Environment Finance, Price Staĸng speciUc risks can be be2er understood and Knowledge Financing LogisƟcs Product quality Lost producƟon Government mi^gated in the agricultural industry. Financing InsƟtuƟonal Temporary over-supply policies Government policies Figure 5 – Integrated Risk Structure: The Farmer's Perspec5ve ProducƟon Climate • Machinery risk • Natural resource risks • ProducƟon loss risk • Risk of natural disasters • Managerial capacity • Eīects of disease or pests Farmer Investment Market • Work health risks • Risk of poor investments • Capital risk • Risk of quality loss • Business and tax risks • Price risks • Excess supply risk Inputs • Input price risks -9- Agricultural Lending: A How - To Guide FIs with extensive loan por1olios will no^ce a comprehensive and integrated strategy to that many risks in Ugure 5 also exist in other oLer sustainable Unancial services in rural industries. However, there are subtle nuances areas. This strategy should include design of that help FIs be2er understand how these risks eLec^ve risk assessment methodologies, appear in the agricultural sector and how development of strategic collabora^ons with be2er to mi^gate them. value chain players, and crea^on of costT eLec^ve distribu^on channels. The following Managing Agricultural Risks sec^on shows how risk management processes can be incorporated into the basic Unancing Working in rural areas is never an easy model. The remainder of the guide will walk proposi^on. Vast geographic areas and low readers through the stepTbyTstep process of popula^on densi^es, o-en sca2ered across crea^ng a Unancial product for agricultural hardTtoTreach loca^ons, result in higher borrowers and how speciUc ac^ons can opera^onal costs for Unancial ins^tu^ons. address these risks before the product is Organiza^ons need to develop and implement oCcially launched. Table 1 – Key Agricultural Risks and Mi5ga5on Strategies Risk MiCgaCon Strategies Climate Risk: Crops are highly suscep^ble to Mi^ga^ng risks of natural disasters is diCcult, but .uctua^ons in climate and rainfall. Lack of access progress has been made in the area of microinT to water sources or irriga^on systems and surance, especially in weatherTindex insurance. temperature varia^ons considerably aLect size When insurance payouts follow a benchmark and quality of harvests. Natural disasters or index, beneUts payments can be targeted to climate events, such as drought or .ooding, beneUciaries who suLer the worst losses see seriously impact the farmer’s ability to meet MicroEnsure case study below . Another way to produc^on demands. mi^gate climate risks is to select regions with high agricultural poten^al and large crop diversity. The bank can diversify its agricultural por1olio across diLerent crops in the region, reducing overall risks. Targe^ng farmers with access to irriga^on also reduces risks of rainfall vola^lity, ensuring more stable yields. ProducCon Risk: Produc^on risks result from FIs need to assess each farmer’s technical and pests and diseases that a2ack crops during the managerial skills by reviewing her/his produc^on growth cycle, as well as from losses caused by techniques in detail, crop diversiUca^on substandard farming prac^ces or inadequate strategies, and access to markets. FIs should have condi^ons during harvest, transforma^on strong risk assessment processes in place, processing , or transporta^on of the produce. enabling them to select lowTrisk farmers. Also, FIs Inadequate handling before and a-er harvest can can collaborate with technology transfer lead to signiUcant losses. Produc^on risks are agencies, Unancing farmer groups that receive directly related to technical and managerial technical and marke^ng support. This holis^c capaci^es of farmers, and to technical constraints Unancing approach increases poten^al business such as quality of agricultural inputs seeds, for FIs and helps stabilize the en^re value chain, fer^lizers, etc. , harves^ng processes, and storage thereby reinforcing the producers at the base. systems. The managerial capacity of a farmer signiUcantly in.uences her/his ability to successfully produce and market crops. - 10 - I)T,+D CTI+) T+ AG,IC LT ,AL I)A)C6 Risk MiCgaCon Strategies Investment Risk: Investment risks relate to Credit oCcers should analyze intended use of the nonTrepayment of credit provided to farmers, loan during the due diligence process to other producers, or other value chain actors. This determine if the investment is wise. As risk may be borne by the FI, or the value chain men^oned above, FIs must develop adequate risk actor ac^ng as retail Unance provider for other assessment processes that will help them actors, which is referred to as “internal” value evaluate managerial capaci^es of poten^al clients chain Unance. and the ra^onale behind the proposed investT ments. NonTrepayment of credit can be greatly reduced by linking repayment through lead actors, such as trustworthy aggregators or exporters. Such actors help ins^ll and ensure accountability. Arrangements of this type are strengthened when lead actors coTsignatories can absorb risks for example, , through equity capital or other collateral and when con^ngency arrangements are in place, to deal with unavoidable risks such as crop failure . Providing Unancing for small farmers indirectly through arrangement with larger value chain actors improves eCciency of credit delivery and decreases risk of nonT performing loans. These types of direct and indirect Unancing arrangements are discussed in more detail later in this sec^on. Input Risk: Input risks may arise when prices of Verifying a history of strong yields and comparing agricultural inputs increase to a point that makes produc^on costs of farmers to regional produc^on unproUtable, genera^ng losses to benchmarks can help FIs assess the produc^on efT farmers and preven^ng them from repaying their fec^veness of poten^al farmer clients. Further, loans. Farmers also face the issue of lowTquality technology transfer ins^tutes and reputable input fer^lizers or counterfeit products in the market, providers are necessary players to ensure quality which could have limited or even nega^ve imT of agricultural inputs. Farmers focused on pacts on yields. improving quality of their products are incen^vized to spend slightly more money on cer^Ued seeds or fer^lizers, when assured of higher yields. FIs need to assess each farmer’s agricultural prac^ces and the quality of the inputs they usually purchase before extending credit. Market Risk: Agricultural products most Fixed contracts throughout the value chain help suscep^ble to subs^tu^on carry the greatest marT mi^gate market risks, especially when ket risk, because purchasers are indiLerent to the dependence on one market can be avoided. FIs source of products that are homogenous and easT should look for contract farming or export ily interchangeable. It is common for farmers to agreements, especially when evalua^ng Unancing have good yields and strong management of crop for other agribusinesses within the value chain. cycles produc^on, harvest, storage only to face In niche markets, such as fairTtrade channels, drops in prices at the ^me of sale due to buyer rela^onships can signiUcantly reduce excess supply. In saturated markets, farmers are marke^ng risks, even for small producer groups. forced to sell at low prices, some^mes even Product standards and cer^Uca^on can also below cost of produc^on. reduce market risks. - 11 - Agricultural Lending: A How - To Guide A more detailed discussion of risk and arrears The following case study is an example of a monitoring for farmers can be found in phase collabora^on between two private sector 5 of this guide. companies seeking a marketTled solu^on to mi^ga^ng one of the biggest risks in the agricultural sector: climate risk. MicroEnsure’s Entrance into Zambia’s Rural Microinsurance Market11 In 2014, MicroEnsure – a large global microinsurance company – began serving the Zambian market with its FarmerShield life and weather insurance product in partnership with NWK Agriservices. NWK is an agribusiness that operates a co2on outTgrower program that engages 100,000 smallholder farmers and has diversiUed into input distribu^on and commodity storage and trading. Faced with famer loyalty and sideTselling problems, NWK partnered with MicroEnsure to oLer weather index and life insurance to its farmers. The companies planned to build weather sta^ons across Zambia to record weather events, but faced with high construc^on and opera^on costs, decided to use satellite imaging to monitor regional weather. Prior to its Urst season of opera^on in 2013T2014, 6,610 farmers signed up for weather index insurance, covering 7,600 hectares. This par^cular weather index product was designed so that beneUts payouts were modeled on the impact of various clima^c events, such as drought or .oods, on co2on yields. Data was collected at a local level and beneUts were automa^cally paid out if the weather event crossed the predetermined level of severity. In 2014, weather events triggered $42,000 of payouts, thus demonstra^ng the value of the product in its Urst season. Further, the FarmerShield life insurance product covered 25,165 farmers’ lives who paid a total of $5,536 for coverage. The net loss ra^o for this product was 48 percent, which is a posi^ve outcome for a life microinsurance product. It a2racted even further demand from farmers to cover addi^onal lives in their households. As a result of this coverage, farmers valued both the weather index and life insurance products and appreciated both direct (for example, claim payouts) and indirect (for example, integra6on into the value chain) beneUts of the insurance products. NWK no^ced a posi^ve impact on its business with increased deliveries and reduced sideTselling (pending 'nal conclusions of this pilot study and the products are expected to be sustainable and proUtable for the insurers and reinsurers. From the ini^al product with NWK Agriservices, MicroEnsure is diversifying its product oLerings to rural Zambians, which is vital for the development of rural Zambian Unancial markets. MODELS OF AGRICULTURAL chain, each segment of the chain should be FINANCE12 considered according to its own merits and an appropriate approach be developed. Figure 6 There are plenty of poten^al Unancing opporT provides an illustra^on of various models that tuni^es within the agricultural sector and value chains. However, there is no “one size 'ts all” approach to Unancing the producers and assoT 11 Cracking the Nut Publica6on, 2015. ciated value chains. While strategically placed 12 This sec6on borrows heavily from IFC’s “Guide for Financ( Unancing can reduce risk across the value ing 12Agriculture Value Chains.” P. Varangis, H.A. Miller, D. Chalila, H. Dellien and D. Shepherd. - 12 - I)T,+D CTI+) T+ AG,IC LT ,AL I)A)C6 Figure 6 – Appropriate Financing Models by posi^on (that is, farmers are locked into selling Value Chain and Enterprise Risk Levels their products to one or few buyers; or strong and enforceable contract farming is in place). High Structured Value Chain Finance - Higher impact, lower reach There also exist a variety of hybrid Unancing - SigniĮcant collaboraƟon models that can be explored between the two ends of the spectrum. These allow for tradeoLs Risk Level of Value Chain Producer OrganizaƟon & Input Supply Finance between the degrees of coordina^on or collabT - Moderate reach and impact ora^on between par^es, depending on where - Moderate collaboraƟon they fall in the risk spectrum. These hybrid models o-en involve more open and light Farm Direct & Agri-SME Finance collabora^ons between FIs and value chain - Higher reach, lower impact companies, where FIs use and leverage local - Limited collaboraƟon Low High knowledge of value chain players to gain access Risk Level of Enterprise to their suppliers and to preTselect those FIs might employ based on risk levels of target farmers with characteris^cs that are a2rac^ve investments. The lower the risk involved in an to the FIs. Later FIs will have a more direct role investment, the more a2rac^ve it is for direct in marke^ng and farmer selec^ons, as well as Unancing. Since risk levels are more elevated in in the loan approval and recovery processes. the agricultural sector, there are other As an illustra^on, in Kenya, local FIs work with Unancing models that can indirectly Unance a large drip irriga^on manufacturer to provide producers at the base of the value chain, withT aLordable Unancing to purchase drip irriga^on out taking on the full risk of direct inves^ng. equipment along with technical assistance for its proper use. FIs here work with the value This illustra^on shows that lowerTrisk farmers chain to provide customized services to help in rela^vely lowTrisk value chains at the bo2om accelerate produc^on. le- corner of the graph can be Unanced with more direct approaches. While the Unancing Extending Unance to enterprises at diLerent reaches the farmer directly, this approach is levels of risk involves certain tradeoLs between limited in its impact on the single farmer levels of impact and outreach. This is partly due directly Unanced. In contrast, farmers that fall to the reality that Unance alone is o-en insuCT into the higher risk categories, concentrate on cient to make signiUcant improvements in commodi^es that are more risky, or live in yields and income, especially for smaller areas that have higher risk proUles, are more farmers. Varying levels of complexity accomT successfully Unanced through structured value pany the Unancing mechanisms for riskier chain Unance approaches. This type of UnancT clients. Typically, the more complex Unancing ing can poten^ally impact many farmers indiT mechanisms for riskier agricultural clients rectly. The Unancing itself will be concentrated address Unancial needs and also their needs for on larger organiza^ons that work with farmers. technology and inputs, technical assistance, and market access. Direct models typically FIs using a structured model of Unancing address Unancial needs. Hybrid models may outsource more func^ons and responsibili^es address needs for inputs, technical assistance, to value chain players. For example, one value and/or market access; depending on the chain player may not only help preselect partners and the nature of the collabora^on. poten^al farmers, but will also occasionally Structured models typically provide a full suite process loan applica^ons and collect repayT of services in conjunc^on with Unance. The ments. This model requires more coordina^on market research process that this toolkit between FIs and value chain players, and is recommends, will help FIs select the most more frequently used in value chains where appopriate lending models, according to their the processor or trader is in an oligopolis^c vision, target clientele, and risk appe^tes. - 13 - Agricultural Lending: A How - To Guide However, structured value chain Unance informa^on on value chain Unance models and models can be diCcult to implement, requiring their advantages and risks, see Appendix B – signiUcant coordina^on among partners with Hybrid and Structured Financing Models. complementary roles and mutually beneUcial incen^ves. Addi^onally, the outreach of strucT Direct Farmer Financing tured value chain Unance is o-en limited to the rela^vely small number of farmers linked to Depending on risk proUles, certain farmers may highly organized value chains. Nevertheless, be a2rac^ve clients for Unancing on a once in place, these hybrid and structured standalone basis. These farmers typically have approaches can create a systemic way to rela^vely diversiUed sources of income (across expand access to Unance for producers, reduce commodi6es and/or ac6vi6es); limited seasonality Unancing risks, and grow the value chain as a and ability to smooth cash .ow throughout the whole. year; irriga^on or limited exposure to weather risks; use of good agricultural prac^ces; and In addi^on to the external aspects of the strong access to markets and favorable prices. Unancing models discussed in this sec^on, FIs From a geographic perspec^ve, these farmers will need to adjust key internal areas – credit also need to be rela^vely easy to reach through policies, risk management, human resources, branch banking or other marke^ng channels on and distribu^on channels – to successfully lend an individual basis. Further, loan sizes ought to to the agriculture sector. During credit assessT be suCcient to jus^fy individual credit assessT ments of farmers, loan oCcers need to gather ments and other overhead costs associated and u^lize informa^on to assess technical level, with direct lending. managerial skills, character, reputa^on, and willingness to repay. Addi^onally, FIs need Iden^fying Farmers for Direct Financing: specialized lending processes and tools to evalT Farmers for whom Unance is the dominant uate both household and farmTlevel cash .ow constraint usually have established wholesale to assess ability to repay, as well as to structure or retail channels and strong rela^onships with loan products to meet borrower needs and a substan^al number of suppliers. From the cash .ow pa2erns. Por1olio monitoring and perspec^ve of FIs evalua^ng repayment risks, risk management should account for seasonalT these small farmers should produce the bulk of ity and adjust to weather and other produc^on their output for commercial sales (not subsis( risk factors via close monitoring and ac^ve tence). The best target commodity groups are management (a more detailed descrip6on of those compe^^ve farmers with good yields arrears monitoring for small farmers is and growing demand for their products. discussed in the rollout sec6on in phase 5). Regarding human resources, rural loan oCcers Agri-SME Financing should have a background in agronomy and A number of agriTSMEs fulUll key func^ons in their performance incen^ves should be many value chains as traders or aggregators to calibrated to balance por1olio growth with risk consolidate goods and provide transport or mi^ga^on appropriate to the agriculture access to other markets. Although they sector. Distribu^on channels may need to be generally do not support farmers with inputs, adapted to reduce costs of reaching clients in technical assistance, or quality control, they remote areas. o-en do provide Unancing to farmers through trade credit or preTUnancing of inputs. IncreasT This guide focuses on adjustments banks need ing working capital Unance for these agriTSMEs to make to Unance the agricultural sector and may be a good entry point for indirectly on the process to design and implement loan Unancing farmers. products for direct lending to farmers and agricultural SMEs (agri(SMEs). For more - 14 - I)T,+D CTI+) T+ AG,IC LT ,AL I)A)C6 The poten^al Unancing opportuni^es for • Ability to work with a signiUcant number certain farmers may be too small and/or of small farmers (30+ small farmers). shortTterm to jus^fy the costs and administraT ^on of direct Unancing. In those cases Unancing FACTORS INFLUENCING THE farmers via agriTSMEs in commodity value chains does not consider the credit qualiUcaT INTRODUCTION OF ^ons of the farmers who ul^mately receive AGRICULTURAL FINANCE13 shortTterm Unance, but instead relies on the Ins^tu^onal buyTin from every level of the FI is creditworthiness of agriTSMEs and their ability important when introducing a new agricultural to manage their own por1olios of outstanding product. Top management should serve as loans. strong “champions” suppor^ng the work of credit managers and loan oCcers. To gain It is not uncommon for successful agriTSME buyTin of senior managers, the team will need traders to be mediumTsized farmers to describe business opportuni^es in Unancing themselves, who procure from other small the agricultural sector, and poten^al upside for farmers in their vicini^es to help cover operatT the FI. During the market research phase, the ing costs of transport to markets. These types team will gather cri^cal informa^on about the of agriTSMEs are normally good borrowers, and agricultural sector to bolster the business case can be used as conduits for credit to small for Unancing it. The presence of these champiT farmers in their procurement network. A ons will ul^mately dictate whether the introT primary cau^on is to assess not only their credT duc^on of agricultural Unance is a success. The itworthiness and management skills but also chances of successfully launching and sustainT their characters to ensure business prac^ces ably running the program is much higher with are acceptable. This assessment should be strong leaders explaining what the opportunity wary of traders that pay low prices, charge high is and how the new processes will be inteT eLec^ve rates for advances, or take large grated into the organiza^on. Conversely, if margins rela^ve to their value addi^on. management is not united on developing a pilot product, divisions within the organiza^on Iden^fying AgriTSMEs for Financing: HighT will form as the workforce tries to understand performing agricultural entrepreneurs can be the mixed messages coming from the leaderT eLec^ve partners in increasing probability of ship. Launching a successful agricultural small farmer success and loan repayment. FIs lending program requires a strong, uniUed should look for: organiza^on and commitment. This guide • A strong documented record of proUtable helps champions within FIs to be2er assess the commercial agricultural opera^ons in the agricultural market poten^al of a par^cular targeted commodity group, preferably as a region, and prepare a business plan and producer strategy for the rural sector, and get buyTin of senior management. • A solid track record of procuring from small producers (and in some cases, organizing Just as a strong and mo^vated culture inside the needed mix of technical and input sup( the FI is key to the success of an agricultural ply services) lending program, a suppor^ve enabling environment outside the organiza^on is also • Strong management and organiza^onal necessary. Private sector engagement is a good skills, to be able to put the pieces together bellwether to help determine the strength of for a growing number of small farmers • Commitment to adding value to small 13 This sec6on borrows heavily from IFC’s “Guide for farmers in ways that increase their producT Financing Agriculture Value Chains.” P. Varangis, H.A. ^vity, quality, and earnings Miller, D. Chalila, H. Dellien and D. Shepherd. - 15 - Agricultural Lending: A How - To Guide the agricultural sector within a country. It is speciUc value chains that present the most much more beneUcial for FIs to operate in en^cing opportuni^es by con^nuously moniT markets alongside private investors making toring these Unancial and governmental equity investments because the risks are policies. For an addi^onal discussion of some diminished further and ac^ve partners can governmental policies and how each one could enhance capacity and produc^vity. Without either enhance or undermine agricultural private sector investment, FIs will need to be lending, see appendix C. more selec^ve when evalua^ng investments in the agricultural sector. Agriculture is an area that receives poli^cal INSTITUTIONAL CAPABILITIES a2en^on, so there may be certain governmenT tal policies that impact its Unancing. Factors A-er establishing that there is strong demand that support agricultural Unance include: for agricultural loans among current and policies that allow FIs to charge adequate poten^al clients, you must ensure that your interest rates to cover the costs of reaching ins^tu^on has the necessary capabili^es and dispersed popula^ons; government intervenT infrastructure to introduce agricultural lending ^ons and subsidies; and appropriate use of eLec^vely. Introducing agricultural loans will loan guarantees. FIs need to iden^fy in have an impact at many levels of the organiza^on. advance any policies that could undermine • Senior Management should be open to agricultural Unance, be aware of poten^al restructuring the organiza^on and aligning pi1alls, and prepare to address those challenges staL to implement agricultural lending early on. For a more detailed descrip^on of eLec^vely. some Unancial policies and how each could either enhance or undermine agricultural • The Credit Department should be capable lending, see appendix C. of adjus^ng and implemen^ng adequate processes for agricultural lending across Policies governing the agriculture sector are branches. The FI should be open to adjustT subject to changes in the poli^cal climate. ing roles and responsibili^es of Ueld staL These changes can both posi^vely and negaT to assess and manage agricultural loan ^vely impact overall proUtability of lending to applica^ons and train branch managers on the sector. There is a variety of policies that approval and monitoring of agricultural have a strong in.uence on the businessT loans using the new processes. enabling environment for agriculture in general and Unancing (and investment) for agriculture • The Risk Department should adjust the in par^cular. For example, agriculture sector policies to address the addi^onal risks policies may include price interference, involved with the agricultural sector, and especially in staple crops, which can undermine implement new processes and tools to market forces and create challenges for the manage and monitor agricultural por1olio Unancing of certain farmers. Trade policies for risks. agricultural commodi^es and inputs (both exports and imports) may include restric^ons, • The Management and Informa^on taxes, quotas, or price controls. Lastly, governT Systems Department should be capable of ment ac^vi^es in infrastructure, irriga^on, making the necessary adjustments to the procurement, and insurance also impact informa^on system to enable .exible loan private sector investments and Unancing of schedules and the use of grace periods agriculture. It is helpful to gather relevant when required to be2er match farmer cash regional and/or commodityTspeciUc informaT .ows. The system should be able to moniT ^on for each of these policy areas when tor an agricultural lending por1olio and possible. FIs can adapt products and target - 16 - I)T,+D CTI+) T+ AG,IC LT ,AL I)A)C6 generate all necessary reports (monthly, • Do you understand what agricultural seasonal, etc.) promptly. Unance is and how it might Ut in your ins^T tu^on? • The Human Resources (HR) Department should be open to adjus^ng the posi^on • Can you explain why introducing agriculT requirements for loan oCcers to facilitate tural lending could present an important the selec^on of staL with agricultural opportunity for your ins^tu^on? backgrounds, and to introducing a training curriculum on risk assessments for agriculT • Do you understand the predominant risks tural loans. HR should be able to manage of the rural sector, and, in par^cular, the a staL specializa^on process by type of agricultural lending risks that you lending product with suppor^ng performT ins^tu^on will need to tackle? anceTbased incen^ve systems. • Do you have a longTterm vision and To guarantee success, the introduc^on of commitment to engage with the agriculT agricultural lending must be consistent with tural sector and make addi^onal provisions and contribute to the organiza^on’s mission, to manage the cyclical nature of the sector vision, and strategic objec^ves.14 even when it is nega^vely aLected by events outside your control (such as weather events)? CHECKLIST By now, your organiza^on’s management team • Have you assessed the diLerent agriculT and board should have talked through the tural Unance models that would best suit challenges and opportuni^es of introducing your ins^tu^on, and whether you can agricultural lending. Using your topTline knowlT incorporate those into your current edge of the market and your ins^tu^on, you ins^tu^onal processes? will have decided whether or not you are ready to begin to look more closely at introducing • Have you inves^gated the Unancial policies agricultural lending. Now is the appropriate that could impact the agricultural sector in ^me to think about how ready your ins^tu^on your target country or region? is, what are your par^cular challenges, who • Can you ar^culate which government should lead the process, and how to set up a policies will impact your entrance into pilot. The following checklist will help to highT agricultural lending and how? light whether you are ready to proceed with planning for the introduc^on of agricultural If you can answer all these ques^ons, you are lending: ready to start planning for your expansion into agricultural lending. 14 Introducing Individual Lending. Women’s World Banking. H. Dellien, O. Leland. 2006. - 17 - The Product Development Process I)T,+D CTI+) T+ AG,IC LT ,AL I)A)C6 The Product Development Process here are some unique risks and As illustrated in Ugure 7, the process begins T challenges in lending to the agricultural with the prepara^on phase. Here, an ins^tuT sector. But some^mes, a li2le innovaT ^on iden^Ues gaps in its lending processes, ^on is all that is required to take advantage of credit risk policies, human resource skills, the tremendous market opportunity in agriculT management systems and distribu^on chanT tural lending. FIs new to lending to the agriculT nels, and iden^Ues the adjustments required tural sector will need to adapt exis^ng lending to engage with the agricultural sector and processes and create Unancial products to manage the par^cular risks posed by it. respond to the characteris^cs, needs, and aspira^ons of this unique sector. An inTdepth In the second phase, ins^tu^ons research understanding of the agricultural sector and its which geographical regions have large potenT players will enable FIs to innovate, thereby ^al for successful agricultural Unance. Once the allowing early movers to stay ahead of the regions are selected, FIs conduct more detailed compe^^on. Ins^tu^ons that con^nue to oLer studies of the poten^al value chains and the same products, which do not address the associated farmer segments. During this phase, par^cular needs of a sector or value chain, will FIs iden^fy the most a2rac^ve and least risky miss out on market opportuni^es. value chains for Unancing and which lending models would be most eLec^ve in reaching However, adapta^on and innova^on cannot be those clients. At this point the team should oneT^me occurrences. Farmers are diverse and prepare a business plan for the pilot, with require many diLerent products. A lack of targets and an implementa^on budget, which understanding of the agricultural sector and its should reach breakeven point within a reasonT players would considerably reduce the chances able period of ^me. of an FI successfully introducing Unancial services in rural areas. Any gaps that exist in The third and fourth phases of the process are product oLerings, such as those that exist in itera^ve. In the third phase, an ins^tu^on will the agricultural sector, represent opportuni^es design Unancial products and a lending and to grow the client base and bo2omTline proUts. delivery model (the strategy) for tes^ng. In the fourth phase, the ins^tu^on implements the pilot strategy and monitors the opera^onal INTRODUCTION TO THE performance of the pilot, the learning of the FIVE-PHASE MODEL staL, and whether the product has been well The process for innova^ng and developing received by target clients. If there are problems Unancial products for the agricultural sector with the lending processes, the products, or can be broken down into a basic UveTstep the outreach strategy, the pilot is redesigned model. The FI should keep in mind risks associT and reTpiloted. This process is repeated un^l a ated with agricultural lending and the Unancial successful pilot (as de'ned by predetermined strategies to mi^gate and manage those risks. metrics) is conducted. - 19 - Agricultural Lending: A How - To Guide In the U-h and Unal phase of the process, the conduc^ng some addi^onal research and going ins^tu^on oCcially launches the new product. through an abbreviated version of the pilo^ng Based on market feedback, FIs may decide to and launch processes again. revise products and make slight changes by Figure 7 – Product Development Process Phase 3 Pilot Design Phase 5 Phase 1 Phase 2 Product Launch and PreparaƟon Market Research Rollout Phase 4 Pilot TesƟng and Monitoring Market Feedback TIMELINE FOR INTRODUCING appropriate response. The en^re new product AGRICULTURAL LENDING development process should take, on average, between 12 to 18 months from the earliest PRODUCTS stages of prepara^on to the launch of the new The design and implementa^on of Unancial product. This ^meline can be compressed or products for the agricultural sector are con^nT expanded depending on how much ^me an uous, given the par^cular characteris^cs of ins^tu^on spends on pilo^ng and tes^ng the value chain players and farmers. Comple^ng new product before it is oCcially launched. the process will take a signiUcant investment Depending on the FI’s experience with tes^ng from the en^re ins^tu^on throughout the new products, it is the itera^ve phases of pilot planning, pilot, and rollout process. It is possiT prepara^on and tes^ng that usually take the ble the ins^tu^on will see some return on its most ^me. investment before the end of the process. Especially if farmers and agricultural businesses There is no set ^me during the year that is best perceive that the FI is interested in understandT for FIs to introduce new agricultural Unance ing their challenges and that the FI is willing to products, so an ins^tu^on can begin the adjust its products and delivery systems to process at any point. The pilot launch and Unal engage more eLec^vely with them. This can launch of a new product may best be ^med serve as a marke^ng point to a2ract more when the target segment is in need of cash. For clients in rural areas. farmers, this is typically just before the plan^ng season when they are seeking money for This ^meline can also be much compressed quality inputs. depending on the current state of agricultural lending within the ins^tu^on. For instance, an STRUCTURE OF TEAM AND FI may already have products similar to what farmers would Und most useful, in which case, LEADERSHIP reUning these exis^ng products will be less During the early planning stages, the senior costly and less cumbersome. On the other management team and other key stakeholders hand, if the needs and preferences of farmers must be involved in the decision of whether or are dras^cally diLerent from those of current not agricultural lending is feasible or desirable. clients, a new oLering might be the most Once the decision is made, a crossTfunc^onal - 20 - I)T,+D CTI+) T+ AG,IC LT ,AL I)A)C6 agricultural lending leadership team should be CHECKLIST created to design the strategic plan, manage Before oCcially beginning Phase 1, consider the research process, design and pilot test the the ques^ons below: product and processes and manage the pilot evalua^on and roll out the product across the • Can you explain why introducing agriculT organiza^on. A senior staL member can serve tural lending is important for your ins^tuT as the agricultural lending project manager, ^on at this point? with the responsibility of driving the process and being accountable for the implementa^on • Do you understand the 5Tstep product of the project through each of the phases. development process and generally what is accomplished in each step? The agricultural lending project manager should be iden^Ued early in the process since • Have you met with a team of senior this person should have an inTdepth underT management to preliminarily discuss the standing of how and why all key decisions are agricultural lending market and how it Uts made. Since agricultural lending is, by its very into the structure of your ins^tu^on? nature, a crossTins^tu^onal endeavor, this person will need to coordinate with a large • Does your team understand the ^meline number of individuals in many diLerent areas involved in crea^ng a new product and the of the ins^tu^on. Lending process need to be levels of eLort required to make the updated, new credit review guidelines created, introduc^on a success? new policies addressing the rural and agriculT tural risks dra-ed and approved, adjustments • Do you understand what is required of the to the marke^ng plans implemented, changes agricultural lending project leader and the to the selec^on and training of agricultural loan type of person that might be successful in oCcers reviewed, new loan repayment plans this role? and grace periods introduced, and performT If you can answer each of these ques^ons, then ance metrics analyzed. The agricultural lending you are ready to begin Phase 1 of the product project leader will need to coordinate these development process. various ac^vi^es throughout the ins^tu^on and guide the process to comple^on. GuideT lines on construc^ng the agricultural lending team are included in Phase 1 of this guide. RESOURCES AND TIMING FIs cannot simply jump into the Urst phase of the product development process. Before beginning Phase 1, each FI should hold a workshop with its board and senior managers to discuss the ra^onale for agricultural lending. During this workshop, management should discuss the levels of market demand for the new product, the government policies related to the sector, the ins^tu^onal environment, and ins^tu^onal skills and capabili^es. This preliminary step should take no more than a few days provided suCcient background inforT ma^on is available. - 21 - Product Development Phase 1 – Preparation P,+D CT D66L+P6)T PHA6 1 – P,6PA,ATI+) Product Development Phase 1 – Preparation he Urst phase of a new product develT conduct an internal analysis of the lending and T opment cycle begins when an ins^tuT risk processes, opera^ons, and personnel to ^on decides to formally inves^gate its iden^fy any poten^al gaps that would need to development. At this point, the FI has usually be Ulled. During this phase, FIs will ensure that conducted ini^al mee^ngs to discuss the goals the updated processes address the new risks of the product and has iden^Ued a project they will face. FIs will also put together their leader or team to guide the process through to leadership teams. comple^on. In the prepara^on phase, FIs Figure 8 – Phase 1 – Prepara5on Phase 3 Pilot Design Phase 5 Phase 1 Phase 2 Product Launch and PreparaƟon Market Research Rollout Phase 4 Pilot TesƟng and Monitoring Market Feedback IDENTIFY INSTITUTIONAL GAPS Senior management should be able to ar^cuT late clearly the vision of the product, how it Uts Many diLerent areas must be inves^gated to into current product oLerings, and who the iden^fy gaps in an ins^tu^on. Everything from designated leaders will be. Unances to opera^ons and lending methodoloT gies to branch structure must be evaluated to Vision: What is the vision for the new product determine if the current processes adequately in three years? Why is it important for the address addi^onal agricultural risks and ins^tu^on? whether the ins^tu^on is ready to introduce a new product. This sec^on will go through some Strategy: How does the new product Ut into highTlevel ques^ons that should be answered your ins^tu^on’s overall strategy? What are when conduc^ng this analysis. For a more the target markets for the new product? What complete diagnos^c tool, see. Appendix D – ins^tu^onal upgrades are required? Are there Ins^tu^onal Diagnos^c. suCcient funds to upgrade and support a new product? - 23 - Agricultural Lending: A How - To Guide Leadership: Are your leaders suppor^ve of the introduc^on of agricultural loans? Do you have change? Is there clear ownership? Are leaders the necessary competencies inThouse? What willing and able to allocate the necessary addi^onal skills and knowledge need to be amount of ^me? Are the leaders aware of the built for the staL to eLec^vely support this par^cular risks that the agricultural sector pose ini^a^ve? If external support is necessary, is to the bank? Do incen^ve structures need to this an op^on that is possible for the FI? be adjusted? Culture: How would the introduc^on of The FI will mobilize staL and other resources to agricultural loans aLect exis^ng behavior at the work on the development eLort and create a branch level? At the head oCce level? How work plan. This plan will help the FI to iden^fy would the FI address resistance or fear of gaps and make adjustments to the necessary change in the transi^on from being an FI lending processes and tools to enable it to focused in urban areas to a lender Unancing be2er engage with the agricultural sector. the agricultural sector? Can this be done eLec^vely? Can ins^tu^on manage diLerent Structures and Processes: Are the current risk product cultures simultaneously? assessment processes adequate to analyze cash and Unancing needs as well as repayment The box below highlights an example of how a capaci^es of rural clients? Can the new product bank in Indonesia systema^cally compared its be eLec^vely provided in rural areas through products and processes to the best prac^ces in your exis^ng delivery structure? What changes the region. This highTlevel gap analysis can help must be made in delivery processes, appraisal an ins^tu^on determine the level of change tools, infrastructure, and internal controls to necessary when implemen^ng agricultural target the agricultural sector in an eLec^ve and lending. cau^ous manner? Competencies: What technical and organizaT ^onal competencies are required for the Phase 1 Featured PracCcal Example: Gap Analysis at an Indonesian FI. Gap Analysis for an Indonesian Bank In 2015, IFC worked with a large Indonesian Unancial ins^tu^on to analyze the ins^tu^on’s current products and processes and to conduct a general gap analysis as the bank prepared to introduce agricultural products. The bank analyzed its current opera^ons in the following areas and compared them against industry best prac^ces: Table 2 – Sample Gap Analysis Analysis Area Best PracCce Indonesian Bank Iden^Uca^on of Conduct market research in each No market research Agricultural Regions region to iden^fy its agricultural with Poten^al poten^al Target Commodi^es Inves^gate all commodi^es and Focused only on palm, rubber, focus on those that have the cocoa, orange, Ush, and poultry strongest market poten^al and proUtability - 24 - P,+D CT D66L+P6)T PHA6 1 – P,6PA,ATI+) Analysis Area Best PracCce Indonesian Bank Target Clients Target lowTrisk farmers and value Lending only to farmers in chain players based on preselected crops, and traders benchmarks to be developed who could use the FI’s current products monthly payments HR Prepara^on Train lending oCcers in agriculT No specialized training curricuT tural lending and agribusinesses lum for agricultural lending Product Design Mul^ple loan products with Loans with only monthly payback grace periods and .exible periods repayment schedules Underwri^ng Process: Detailed analysis of both farm Loans based on total area of crop Data Gathering and nonTfarm income produc^on Underwri^ng Process: Based on cashT.ow data Based on technical card Income Calcula^on collected during an interview assump^ons of income and and crossTveriUed against expenses regional benchmarks Underwri^ng Process: Thorough data veriUca^on of Focused on veriUca^on of value VeriUca^on farm and nonTfarm ac^vi^es, and loca^on of collateral usually including technical skills, yields, commercial real estate and collateral Underwri^ng Process: Evaluate crops, technical level, Capacity to repay a loan is Credit Analysis cashT.ow pa2erns, Unancing assessed using crops’ data from needs, and repayment capacity technical cards data and collateral valua^on Monitoring of Crop Regular monitoring of crop Only monitor prices Trends prices, produc^on volumes, and growth Coverage Area Pilot in a strategic region and Rolled out anywhere based on later roll out the product to demand other regions based on market poten^al Based on what they found a-er conduc^ng this gap analysis, the bank was able to adjust its resources and personnel to build a strong agricultural lending unit. This preliminary gap analysis, along with the analysis is completed, a detailed ac^on plan informa^on provided in the ins^tu^onal analyT should be prepared with adjustments required, sis in appendix D, will give the FI a clearer due dates, and the staL responsible for its picture of how ready the ins^tu^on is to introT delivery. In many cases, external support might duce a new product, and what adjustments are be necessary to help the bank design and required to enter a new market. Once the gap implement the adjustments iden^Ued. - 25 - Agricultural Lending: A How - To Guide MANAGEMENT INFORMATION decision process; and loan processing and loan SYSTEMS (MIS) REQUIREMENTS disbursement. The applica^on should provide informa^on on the ^mings required from loan Managing agricultural loans requires FIs to applica^on to loan disbursement. design or adapt so-ware applica^ons that will 2) Financial and Risk Summary for the Credit enable the ins^tu^on to manage clients more Commiee: Cri^cal farmer informa^on in one eCciently. MIS should, therefore, allow loan page to be used by the credit commi2ee during oCcers to process loan applica^ons swi-ly, the loan approval. This informa^on includes while providing objec^ve informa^on on the the balance sheet, income statement, Unancial risks and repayment capaci^es of clients so ra^os, and risk parameters for each farmer. that the credit team can make objec^ve Some applica^ons could have an integrated decisions. MIS should enable the design of scoring model and decision tree to improve adequate loan payment plans that match standardiza^on and objec^vity of loan analysis farmers’ seasonal cash .ows. It should provide and approval. Those parameters should be ^mely informa^on on por1olio quality. This will clearly disclosed. enable FIs to closely monitor payment schedules and to react promptly when 3) Loan Approval/Rejec5on: A summary of all problems arise due to weather or price shocks. credit commi2ee decisions, numbers and amounts of loans approved by session, reasons MIS should help banks organize the lending for loans rejected, and sta^s^cs on loan process into three modules: Client, Loan, and decisions on a monthly and weekly basis. Cash. 4) Loan Installments design: Enables the FI to Client Modules reduce its credit risk by designing .exible loan The client module should have at least three installments that match farmer cash .ows. The applica^ons: main type of payments that the system should oLer are: 1 Irregular installment amounts with 1) Client Maintenance: FI staL can register new irregular installment schedules; 2 Grace clients and update current clients, coTsigners, periods; 3 Irregular installment amounts with and guarantor informa^on. regular installment schedules; and 4 Regular 2) Financial Informa5on Maintenance: Loan installment amounts with irregular installment oCcers can capture and register Unancial schedules. informa^on from the client and farm visits (for Cash Modules example, farm assets, liabili6es, revenues, expenditures). This module should also enable This module allows banks to register all loans loan oCcers to update clients’ Unancial inforT disbursed and collected during a period, the ma^on and register and update guarantees. main applica^ons are: 3) Financial and Risk Informa5on Analysis: 1) Credit disbursement: Enables the bank to Loan oCcers can capture and summarize disburse loans and monitor all scheduled clients’ socioeconomic and Unancial details, disbursements. risk informa^on, and guarantee reviews. 2) Payment: Collects and registers all payments Loan Modules scheduled and received by the bank. This module should help FIs eLec^vely manage 3) Disbursement of Reschedules Loans: large volumes of loan applica^ons in at least Processes only those loans that have been four applica^ons. rescheduled due to external shocks. 1) Workow Monitoring: Organize and moniT 4) Monthly Payments and Disbursements tor loan applica^ons by work.ow stage: loan Report: Monitors all disbursements and installT request; farm visit and data collec^on; loan ment payments made in a period, and provides - 26 - P,+D CT D66L+P6)T PHA6 1 – P,6PA,ATI+) detailed monthly reports by loan oCcer, Depending on the FI’s management structure, branch, and region. this person may also manage new agricultural FIs can purchase satellite so-ware applica^ons lending staL. to manage and monitor all of this informa^on, In addi^on to the project manager, a core which could then be synchronized with the group of people from within the ins^tu^on core banking systems already in place. Some of must oversee and manage the process of these client management solu^ons are designing, developing, and implemen^ng available for FIs to purchase as oLTtheTshelf agricultural lending. The group should be solu^ons. FI staL will then need to work on composed of board members, senior integra^on and synchroniza^on of the new managers, and key opera^ons staL to ensure systems with their core banking systems. an integrated treatment of the challenges Other FIs, with fully integrated core banking posed by the implementa^on of this product. solu^ons, could decide to develop or adjust This team should have the skills, capacity, and those applica^ons in their core banking system. commitment necessary to oversee the pilot, Whichever solu^on the FI chooses, the FI and should represent the interests of the staL should be sure to work with specialized experts directly aLected by the changes. The leaderT in agricultural lending systems. Some tools ship team should be crossTfunc^onal, typically available on the market include the ACDITVOCA including the heads or representa^ves, ideally tool men^oned later in this guide, or the tool from each of the following departments: used by IFC (CLARA), among others. • Opera^ons and Credit Department (espe( BUILD INTERNAL LEADERSHIP cially senior(level branch managers) TEAM • Risk To delve deeply into many of these areas, the • Finance FI will need to appoint a project manager and • Administra^on a crossTfunc^onal leadership team to manage the ini^a^ve. The agricultural lending project • Human Resources manager should drive the change process and • MIS be accountable for implemen^ng the project through each phase. Also, this person should • Internal Audit. serve as the primary point of contact with Substan^al ^me and eLort should be invested external agencies or consultants. should the FI in the selec^on and training of this core team. decide to seek extra technical advice. This is essen^al not only to ensure wellT The project manager should ideally have some designed loan products and policies, but also knowledge of agricultural Unance and have to ensure that the core team is capable of strong analy^cal, planning, and communicaT training other staL as the new product is rolled ^on skills. Selec^ng this person from among out. Because these individuals also are responT exis^ng staL is beneUcial since the person will sible for guiding changes across the ins^tu^on have a solid knowledge of the ins^tu^on, its required for delivery of agricultural loans, they organiza^onal culture, and clients. The princiT will need to be strategically selected and pal responsibili^es of the project manager are: supported by managers. • To drive development of all aspects of the During the implementa^on phase, the project agricultural loan product, policies and manager will play an important func^on in procedures, systems and quality control. driving the process and coordina^ng with the • To support opera^ons staL with backstopT leadership team to oversee adjustments ping and guidance during implementa^on, required in the diLerent departments across especially during the pilot phase. - 27 - Agricultural Lending: A How - To Guide the organiza^on. Since each of these departT ing staL to ensure wellTcoordinated product ments will be required to revise their systems implementa^on. and ac^vi^es with the introduc^on of the new A-er deciding how the agricultural lending product, their support and ac^ve involvement staL will Ut into the ins^tu^on, the project in the decisionTmaking process is crucial in the team should develop the organiza^onal early stages. structure for the pilot phase. The chart should illustrate speciUc managers and loan oCcers, PREPARE FOR IMPLEMENTATION and it should clearly delineate the repor^ng The agricultural lending project team should hierarchy. The recommended structure should create a highTlevel ac^on plan when preparing facilitate delivery of highTquality products and to introduce agricultural lending products, services while encouraging eLec^ve sales and especially if the agricultural sector is a new tarT collec^on eLorts. Loan servicing and monitorT get market. This plan must cover ins^tu^onal ing needs should also be examined and the capacity building, preliminary market research, opera^onal pla1orm reviewed to ensure the and pilot plans. To accomplish this, the project appropriate team is trained in agricultural team should assemble all materials and inforT products and in place to monitor the por1olio ma^on generated to this point and consider of generated loans. The new structure will be the following: tested during the pilot phase. The team will have a chance to assess poten^al new technolT • Ins^tu^onal goals for the agricultural lendT ogy pla1orm requirements involving investT ing product ments in technologies (for example, handheld • Ins^tu^onal changes required to meet devices or GPS units), vehicles, mobile banking goals units, or other equipment needed to reach borrowers located in rural areas. Crea^ng • An^cipated changes to other products and lowerTcost satellite oCces that are staLed services during market days could be a strategic op^on. • Proposed stages and detailed ^meline to Also, the project team must review and adjust ensure success of the product introduc^on the goals and objec^ves of the sales and process, including responsibili^es, deadT underwri^ng teams to ensure that they are lines, and whether external support will be aligned with the growth objec^ves of the pilot. solicited Agricultural loan oCcers should mainly focus • Iden^Uca^on of a specialized advisory on expanding the agricultural por1olio. service provider to support the ins^tu^on However they should also process nonTagriculT with adjustments to the lending processes tural loans in rural areas. Focusing only on and training of staL agricultural loans could reduce a loan oCcer’s produc^vity due to the seasonal demand for • Preliminary Pilot budget and Unancial agricultural loans and could also increase the projec^ons. concentra^on of the ins^tu^on’s por1olio The project team must have a complete underT risks. Therefore, each loan oCcer’s por1olio standing of the organiza^onal structure and exposure to agriculture should be limited to how departments coordinate work by studying around 40 percent to 50 percent. The loan internal strategic plans and organiza^onal oCcers focusing on agriculture should have charts. Par^cular a2en^on should be paid to adequate experience with agriculture, allowing all departments that will oLer opera^onal them to eLec^vely analyze farmer produc^on support to those involved with agricultural techniques, managerial skills, basic credit lending. Everyone should have a clear underT demand, and risks before passing on the best standing of the repor^ng structure and support applica^ons to the credit commi2ee. Ensuring mechanisms available for the agricultural lendT technical capacity of loan oCcers will require - 28 - P,+D CT D66L+P6)T PHA6 1 – P,6PA,ATI+) the project team to develop an outline for though they can own the Unal result. Not all appropriate training for each loan oCcer, sugges^ons or recommenda^ons can be impleT including specialized training in the highest mented, but the project team should follow up priority value chains. with relevant staL members, so that they feel that their voices have been heard. To complete the prepara^on phase, the project team should present and review the pilot’s orT ganiza^onal structure and opera^onal pla1orm CHECKLIST requirements with the senior management During this phase, your ins^tu^on’s manageT team to ensure eLec^veness and buyTin. ment should use the data you already have to understand how the new products will Ut into CHALLENGES AND LESSONS the ins^tu^on. You should also have iden^Ued LEARNED a core agricultural lending project manager and leadership team and developed a highTlevel One of the biggest challenges in preparing to ac^on plan that will start to implement during launch a pilot is to design a costTeLec^ve Phase 2 – Market Research. At this stage, your model to test the product without redirec^ng ins^tu^on’s senior management needs to important resources and funds from the ins^T spend ^me providing clear direc^on and vision tu^on. inside the organiza^on on how agricultural Having the right level of agricultural exper^se lending will be introduced. is cri^cal to driving sustainable growth of the The following checklist will help determine agricultural loan por1olio. Many FIs Und it whether you are ready to proceed with phase extremely challenging to Und staL that 2 of the new product development process: possesses inTdepth knowledge of agriculture as well as the lending experience required to • Have you assessed your ins^tu^onal readiT serve clients eLec^vely. FIs o-en have to ness to introduce agricultural lending? decide whether to hire agricultural experts and • Have you iden^Ued a fullT^me, competent, train them to lend or provide agricultural and knowledgeable senior manager to lead training to exis^ng lending staL. the agricultural lending ini^a^ve? Past experience has shown that it is usually • Have you established a crossTcung team easier and more eLec^ve to train agricultural to provide leadership throughout each of experts in Unancial analysis and lending to the phases of the process? farmers and rural businesses than to train exis^ng loan oCcers on agricultural produc^on • Have you put together your highTlevel techniques. By training agricultural experts in ac^on plan for each phase of the process, Unancial analysis, FIs have increased their detailing how and with whose support produc^vity in rural areas while simultaneously each phase will be conducted? providing adequate Unancial services to • Have you iden^Ued an external technical farmers in a sustainable manner. advisor to guide the ins^tu^on with adjustT Another challenge frequently faced at this ments required to implement lending stage is the building of consensus among key processes and tools for agriculture and internal stakeholders. A large number of agribusinesses? people in the ins^tu^on will be directly or • Have you begun to build understanding indirectly aLected by the introduc^on of and commitment to the process of agriculT agricultural lending. So, its success will depend tural lending among your staL and key on their commitment and enthusiasm. The stakeholders? more input people can have in deUning the changes made, the more they will feel as - 29 - Product Development Phase 2 – Market Research P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH Product Development Phase 2 – arket ,esearch he second phase of the new product In the market research phase, the project team T development cycle begins a-er an ins^T gathers informa^on to understand characterT tu^on has Unished conduc^ng its gap is^cs of the new clientele, market dynamics, analyses, preparing its leadership team, and and es^mates of crop volumes, seasonality of building internal support. At this point, the income, crop diversiUca^on strategies, and project team is ready to conduct inTdepth Unancing needs by sector and size of farmer. research on poten^al new clients and markets. Figure 9 – Phase 2 – Market Research Phase 3 Pilot Design Phase 5 Phase 1 Phase 2 Product Launch and PreparaƟon Market Research Rollout Phase 4 Pilot TesƟng and Monitoring Market Feedback Some important ques^ons FIs usually ask when • What are the skills and HR competencies deUning agricultural expansion strategies required to lend to farmers? include: • What delivery channels are more eLec^ve • What are the main challenges when in rural and agricultural areas? expanding Unancial services into rural areas? • What are the most eLec^ve marke^ng strategies to reach farmers? • What type of farmers and ac^vi^es should we Unance? The project team will use the informa^on discovered during the market research phase • Who are the key value chain players and to select regions with the strongest agricultural how can we collaborate with them? poten^al. They will study farmer proUles and links in the target value chains to design a profT • What would be the role and responsibiliT itable business model and develop sectorT ^es of the diLerent partners in a value speciUc Unancing products. Once the products chain Unance model? have been developed, their acceptance by poten^al clients is important for the success of • What are the best risk assessment models the business model. Addi^onal market and tools for lending to small farmers? research may be needed later to con^nually - 31 - Agricultural Lending: A How - To Guide reUne and improve products and adjust them network of weather sta^ons. Many developing to market needs. economies lack those systems and technoloT gies. But even without the presence of insurT SELECTION OF REGIONS WITH ance, banks can s^ll use diLerent strategies to mi^gate risks and provide Unancing to the HIGH AGRICULTURAL POTENTIAL agricultural sector. Therefore, insurance is just The Urst step in the market research process is one fact to consider in the selec^on of a region to determine which markets make the most to start a pilot on agricultural lending. sense to research and which markets expose the FI to the lowest risk. In this case, since the The bank should iden^fy and select regions project team is inves^ga^ng the development with high agricultural poten^al and crop of new agricultural lending products, the FI diversity. It should also look for regions with should select regions with high agricultural dynamic private sectors (traders, other agricul( poten^al as prime targets for the new products tural industries/processors, and exporters), to minimize risks. FIs can diversify their risks by which buy crops from farmers or add value by Unancing mul^ple crops throughout the year processing them. Addi^onally, governments, in these regions. FIs can Unance an even wider donors, and NGOs can provide valuable array of projects while mi^ga^ng weather risks extension services. Regions with training in regions with access to irriga^on. ins^tutes that transfer skills on best agricultural prac^ces to improve crop yields and income Crop insurance is emerging as an important are important in reducing produc^on risks. enabler when Unancing agriculture because FIs These organiza^ons can help the bank iden^fy can use this tool to minimize losses in par^cuT and select communi^es that have beneUted larly risky regions. However, in many emerging and adopted best prac^ces. economies, crop insurance is not available, or is limited. Alterna^vely, weather index insurT When analyzing a region for its agricultural ance can be used to cover agricultural por1olio poten^al, the project team should consider the risks, but requires a reliable data on clima^c variables listed in table 3: events, which are usually gathered by a Table 3 – Variables to Analyze When Researching a Region's Agricultural Poten5al Variables Region 1 Region 2 Region 3 Agricultural Land Total land Agricultural land Agricultural land with irriga^on PopulaCon and GDP Total popula^on - 32 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH Variables Region 1 Region 2 Region 3 Rural popula^on Total GDP Agricultural GDP Crops Produced in Hectares !HA# Basic grains Vegetables Fruits Industrial crops Livestock heads Poultry Egg layers Piggeries Ca2le Dairy produc^on Main Value Chain Present Agricultural processors Crop exporters Crop Retailers The selec^on of appropriate regions is essenT will determine its risk exposure level. Of ^al to the success of agricultural expansion course, if the FI already has branches in the because it can greatly reduce risks. The branch most a2rac^ve agricultural regions, these selec^on process evaluates the agricultural and would be the best places to start evalua^ng market poten^al of a par^cular region, which target clients. - 33 - Agricultural Lending: A How - To Guide Phase 2 Featured Prac5cal Example: Analysis of rural agricultural markets and risk analysis in Vietnam. Vietnamese Banks Work to Expand Rural Lending In 2013, IFC inves^gated Unancing opportuni^es to farmers and agricultural enterprises. The team iden^Ued three regions in Vietnam (Red River Delta, Central highlands, and Mekong Delta), which have signiUcant poten^al for agricultural produc^on. A-er analyzing the principal crops, total area planted, and produc^on volume, the team narrowed down the regions, and conducted detailed value chain analyses in two regions: the Central HighT lands and Mekong Delta. IFC Team visited several districts in each region and interviewed farmers producing diLerent crops and other value chain players by size (small, medium, and large). The team inves^gated both perennial crops (tea, coee, rubber, pepper, and cashew) as well as seasonal crops (rice, maize, and vegetables). It also studied livestock (Ca le, pigs, and poultry). The team found that the percentage of land used for agricultural, and the diversity of crops, were key indicators of the agricultural Unance poten^al in the region. In the Central High Lands, the use of land for agriculture was between 15 and 38 percent. In rela^on to the poten^al demand for loans, there were approximately 450,000 farmers in the region, of which 86 percent owned less than 2 hectares. Nonetheless 10 to 15 percent of small farmers rented addi^onal land for produc^on, which showed the strong demand that existed for their products. With these Ugures, together with a preliminary analysis of the private sector, the team concluded that the value chain actors in the Dak Lak region of the Central Highlands oLered more opportuni^es to diversify the loan por1olio. This would help banks be2er mi^gate agricultural and market risks. Some Unal criteria to consider when selec^ng • Good communica^ons with head oCce branches to pilot the new agricultural lending • Adequate physical space at branch for product include: addi^onal staL and clients. • Opera^onal selfTsuCciency for at least two years EVALUATE TARGET CLIENTS Once poten^al regions are selected, the • Good performance indicators and smooth second part of the market research stage is to opera^ons iden^fy farmers’ and value chain players’ • Strong regional demand for agricultural charactersi^cs. This helps the project team to loans segment poten^al clients and determine how many are bankable and how many would be • Limited compe^^on in agricultural Unance interested in agricultural loans. This step (that is, rela6vely neutral tes6ng ground) enables the FI to understand the demographic • Organized branch manager with strong details of their new poten^al clients and how leadership and management skills best new agricultural products could meet - 34 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH their needs. With a detailed understanding of where the strongest poten^al clients will fall. the average farmers’ produc^on capacity, Since the FI is evalua^ng lending directly to assets, and cash .ows, ins^tu^ons can design farmers, two of the most cri^cal indicators will Unancial products suited to the needs of be farmer incomes and farm sizes. It will be regional farmers. A thorough picture of farmer best to break up the data into three or four proUles, including produc^on cycles and cash income/farmTsize segments and then analyze .ows, will help ins^tu^ons deUne loan these key factors: amounts, grace periods, frequency of installT ments, and terms suitable to farmer needs in • Average area cul^vated the diLerent target regions. The project team will need to interview poten^al clients in the • Average income a2ributable to each type Ueld, which can be great preliminary training of crop/livestock for loan oCcers, who will need to collect this • Number of seasons per year kind of informa^on in the future to assess client loan applica^ons. For a sample farmer • Average produc^on costs segmenta^on interview form, see appendix E • Average annual proUt – Sample Producer Segmenta^on Interview Form. The FI should plan on using these forms • Average assets available to post as to interview individual farmers in the target collateral region. It is best to interview 9 to 12 farmers in • Average loan amount demanded and the region for each target crop or sector. These received farmers should represent a range of farm sizes • Average monthly loan installments. and crop metrics so that the FI can get a more holis^c picture of target clients. The FI should analyze each of these factors for an average small, medium, and large farmer in When evalua^ng poten^al clients and the the region for the last agricultural year, as results of the segmenta^on interviews, the deUned by income segment or farm size. Crop project team should keep the following yields, volumes sold, and crop prices in the ques^ons in mind: region, commercializa^on channels, and market dates should be iden^Ued. NonTfarm • Who are the target clients for agricultural income, such as ren^ng of property or sales of lending at the FI? related goods should also be taken into • Will the FI focus mostly on crossTselling to account. Finally, produc^on costs should be exis^ng clients, or seeking new clients elseT es^mated with breakTups for labor, agricultural where? inputs, and other costs. Based on this data, the FI can es^mate yearly income, produc^on • If the FI does choose to seek new clients costs, and net income for diLerent types of for the agricultural loan product, what will produc^on. Es^mates can be rough at this this mean for the por1olio in terms of stage since the objec^ve of the exercise is to client mix? understand the characteris^cs, Unancing • What eligibility criteria will be used (for needs, and credit risk associated with diLerent example., net farm income, repayment types of farmers of the target region. This history, number of employees, growth informa^on will enable the ins^tu^on to deterT prospects, and sector)? mine which type of farmer oLers a lower or Once all the data is gathered, it will be helpful more balanced risk proUle. For a detailed to organize it in either Microso- Excel or example of what this analysis could look like, another database applica^on to analyze the see appendix G T Farmer Segmenta^on Analysis. informa^on. In this way, the team can break the responses into categories and analyze The following example illustrates how the project team could evaluate target clients. - 35 - Agricultural Lending: A How - To Guide Target Client EvaluaCon for Farmers in Vietnam As part of an agricultural lending market research eLort, IFC evaluated in Vietnam the risk levels of farmers in some promising agricultural regions to understand the produc^on cycle, distribu^on channels, and main challenges faced by them. The team asked farmers to deUne the criteria used to classify small, medium, and large farmers in the surrounding area, and es^mate the percentage of farmers that would fall under each category. Finally, the team asked farmers to select nine farmers to be interviewed, three farmers per each category (small, medium, and large). They asked about employment numbers and inves^gated whether the farmers planted any addi^onal crops besides coLee on their farms (see table 4). Table 4 – Coee Producer Proles in Central Highlands Large Medium Small Crops !Ha# CoLee 20 4.5 1 Pepper Intercrop with CoLee 3.5 Fruit Rambutan, Orange 5 Total 25 4.5 1 # Temporary Employees 20 12 1 The team found that large farmers operated on average 10 HA of land or more (owned or rented), medium size farmers operated on 2 to 9 HA, and small farmers operated on 1 HA or less. The next step in the evalua^on consisted of looking at the balance sheets of each farmer. The team evaluated assets – including a breakdown of current assets (for example, working capital and inventory) and Uxed assets (for example, irriga6on systems, equipment and house) – as well as liabili^es and equity. The team also constructed simple income statements to see how much each farmer made and when they received payment for their goods (see table 5). Table 5 – Total Assets and Last 12 Months Farm and Family Income ($) LARGE MEDIUM SMALL Co ee Size Income Size Income Size Dec T Feb/full produc^on 20 HA 115,500 4.5 HA 16,000 1 HA 5,850 May 4.5 HA 14,000 Pepper Feb 3.5 HA 65,000 2 HA 13,500 Jun 2 HA 27,000 - 36 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH LARGE MEDIUM SMALL 3,000 Eggs 64,800 Egg layers Fruits 500 Nov T Dec 5 HA 24,000 TOTAL INCOME 204,500 135,300 6,350 TOTAL PRODUCTION COSTS 83,280 54,640 2,580 41% 40% 41% NET FARM INCOME 121,220 80,660 3,770 Other Family Income Agri Input Dealer Fer^lizer 8,000 Trading CoLee & Rice 1,200 Electric Installa^on 12,000 Rent of House 900 Interest Income Por1olio 17,100 Total Other Family Income 26,300 12,900 1,200 Net Farm Income + Other 147,520 93,560 4,970 Income Percentage Farm 82% 86% 76% Income/Total Famer Income Family Expenses 14,670 5,884 3,210 Disposable Income/Year 132,850 87,676 1,760 The diLerences are important when comparing yearly income because there is a very healthy income mix of onTfarm and oLTfarm income, par^cularly for large and mediumTsized farmers. The large farmer with 20 HA of coLee and 3.5 HA of pepper generates a total net income of $121,220. This farmer also has an oLTfarm income of $26,300 from an agricultural inputs store, coLee trading, and interest rates from small loans made to local farmers. - 37 - Agricultural Lending: A How - To Guide On the other side, the small farmer only has income from coLee and a secondary income from fruits. His yearly net income is approximately $3,770 from both ac^vi^es. The small farmer needs to work as an agricultural worker to complement his farm income to cover all family expenses. Next, the team evaluated the Unancial demand of each farmer type and inves^gated what aspects of a loan were a2rac^ve to each prospec^ve client (see table 6). Table 6 – Financing Needs for Coee Farmers in Central Highlands Variables Large Medium Small Loan amount $15,000–30,000 $6,000–10,000 $1,500–3,000 Use Expand fer^lizer Buy more land for Working capital for business coLee coLee Loan term 10 months 3 years 1 Year Disbursement 1 Disbursement 1 Disbursement 1 Disbursement Payment Plan End of term/quarT Yearly Yearly/January/Mont terly interests rate hly interest payment Collateral Land/red book limits Farm Farm borrowing Percentage of Farmers 5% 25% 70% by Size Number of Farmers 4,334 21,670 60,677 Target 30% = 1,300 Farmers 30% = 6,500 Farmers 10% = 6,068 Farmers Average Loan Amount $12,000 $6,000 $2,000 Market Size !esCmated# $15.6 million $39 million $12.1 million In the communi^es visited, farmers es^mated that 5 percent of the total farming popula^on were large farmers who had more than 10 HA of land; 25 percent were medium farmers with 2 to 9 HA of land; and, 70 percent were small farmers with 1 HA of land or less. In the hypothe^cal case that the bank would target 30 percent of the total number of large and medium farmers in the region, the team es^mated they could reach 1,300 large and 6,000 medium farmers. The por1olio growth poten^al in 3T5 years for lowTrisk farmers (large and medium farmers) could reach $15.6 million and $39 million respec^vely. This preliminary calcula^on shows promising business opportuni^es for the bank in the region. - 38 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH A-er mee^ng with farmers in the Ueld and interest on loans and the principal in lump collec^ng the requisite informa^on, the project sums two or three ^mes a year. They tend team can divide the interviewees into risk to be commerciallyToriented with categories. Farmer risks are associated with the adequate crop produc^on volume, which frequency and regularity of their cash .ows generates midsize revenues. They possess along with their level of technical skills and average to good technical skill levels. exper^se with diLerent crops. Broadly, farmers can be placed into the following risk groups: • High(risk farmers: Those who have low crop diversiUca^on, generate only seasonal • Low(risk farmers: Those with good crop income, who cannot pay interest or princiT diversiUca^on, mul^ple harvests per year, pal on a monthly basis, but can only pay and access to irriga^on, which enables lump sums at the end of the crop cycle. them to generate regular monthly cash They generate small produc^on volumes .ows. They are usually commercially mostly directed to household consump^on oriented with sizable produc^on volumes and small por^ons directed to the markets. that generate strong revenues and high They possess low to medium technical skill repayment capaci^es. They possess good levels. technical skill levels and have mul^ple buyers. The following example illustrates how the project team could use the informa^on from • Medium(risk farmers: Those with some the farmer evalua^on above to arrive at an crop diversiUca^on, mul^ple harvests per appropriate risk level determina^on. year, and can pay at least the monthly Risk Level EvaluaCon of Farmers in Vietnam To determine risk levels of farmers in the evalua^on above, the team studied the results of the evalua^on and summarized the Undings in a table that clustered farmers by risk proUle. Table 7 displays farmer risk proUles in the Central Highlands. Poultry and egg producers in the region produced good volumes, generated strong cash .ows, and had monthly incomes enabling them to pay monthly installments. These producers had good technical skill levels and secure access to markets. The coLee and pepper farmers had diversiUed produc^on and mul^ple incomes throughout the year. Both crops had strong demand in interna^onal markets and prices were trending upward. These farmers applied good agricultural prac^ces. Finally, the team found that rubber producers were the riskiest, par^cularly because of the excessive specializa^on and lack of alterna^ve crops. Addi^onally, producers in the region had a limited number of interested buyers. Even though rubber trees can generate income during eight months of the year once in full produc^on, it takes seven years for rubber trees to reach full produc^on capacity. - 39 - Agricultural Lending: A How - To Guide Table 7 – Farmer Risk Proles of Central Highlands Risk Levels AcCviCes Low Risk Poultry and egg producers or pig producers combined with coLee or pepper Strengths: Frequent cash ows, diversi'ca6on of risks, mul6ple income streams throughout the year, access to markets, stronger management skills Risks: Price vola6lity, suscep6ble to pests and disease Medium Risk CoLee and pepper farmers Strengths: High demand for products, high crop values, good technical skills Risks: Seasonal income, moderate diversi'ca6on, price vola6lity High Risk Rubber producers Strengths: Access to markets, strong demand, income spread over eight months Risks: No inter(cropping op6ons, long gesta6on period (seven years), high investment per HA, only one source of demand The example above shows that es^ma^ng the the village as well as the percentage of small, poten^al regional demand is cri^cal when medium, and large farmers living in the village. deciding whether or not to expand Unancial The team used this informa^on, along with the services. The team es^mated the poten^al Unancial needs of each type of farmer, to come demand during their mee^ngs with farmer to a reasonable es^ma^on of market size. groups. During these mee^ngs, farmers were Table 8, shows the poten^al demand for the Urst asked to es^mate the total popula^on of Central Highlands. Table 8 – Es5mated Por olio Size for Central Highlands AcCvity Large Medium Small Total Target Poultry and Egg Producers 113 565 584 1,262 Average Loan $ 75,000 30,000 7,500 n/a Porolio Outstanding !$# 8,475,000 16,950,000 4,380,000 29,805,000 Target CoLee and Pepper Producers 1,300 6,500 6,068 13,868 Average Loan $ 12,000 6,000 2,000 n/a - 40 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH AcCvity Large Medium Small Total Porolio Outstanding !$# 15,600,000 39,000,000 12,136,000 66,736,000 Target Rubber Producers 91 182 182 454 Average Loan $ 60,000 20,000 5,000 n/a Porolio Outstanding !$# 5,454,000 3,634,000 908,750 9,996,750 Total Outstanding Porolio !$# 29,529,000 59,584,000 17,424,750 106,537,750 Outstanding Clients 1,504 7,247 6,834 15,584 FIs can es^mate poten^al growth and assess analyze which other Unancial ins^tu^ons are the por1olio risk level for a region with this present in the region, which segments they informa^on,. FIs could then selec^vely choose target, and what type of products they oLer to where to launch new agricultural products the agricultural sector. When pilo^ng a new based on their risk appe^tes. agricultural lending product, you must have a detailed understanding of the lending products COMPETITIVE LANDSCAPE oLered by the compe^^on. This informa^on helps the FI can understand how compe^^ve ANALYSIS and a2rac^ve the new product is. Basic inforT As men^oned in the introductory chapters, the ma^on that could be collected the compe^tors team should evaluate impacts that government is summarized in table 9 below, as well as in programs might have on the agricultural sector. appendix F – Compe^^ve Posi^on Analysis. SpeciUcally, subsidies or other programs may While it may be challenging to a2ain this level challenge the Unal viability of a new product of detail – since many ins^tu^ons are usually aimed at the agricultural sector, so the team hesitant to share speciUcs of their loan por1oT should thoroughly research these programs at lios – this informa^on can be very useful when this point. Addi^onally, the team should designing the Unal product. Table 9 – Variables to Consider when Researching Compe5tors' Products Variables Bank 1 Bank 2 Bank 3 Total Bank’s Porolio Loans for Agriculture Segments/sectors targeted Minimum and Maximum Loan Amount Loan Term Grace Period Payment Schedule Interest Rates Administra6on Fees Other Fees Time from Applica6on to Disbursement - 41 - Agricultural Lending: A How - To Guide By using this data, and the results of the duce agricultural lending. If research reveals a industry, compe^^on, and geographical ^ght market with s^L compe^^on and li2le analyses, the project team will have a good room for new entrants, management may idea of the ideal client proUle and where the want to con^nue to serve current target product should be launched. This informa^on market segments with greater eCciency and will help ensure that the FI designs adequate improved service rather than diversify product products tailored to the needs of this new oLerings to the rural sector. Or, if the FI assessT client base. It will also help the FI launch its ment reveals capability gaps or suggests that expansion with clients that represent the the Unancial or administra^ve burden would lowest risk for the ins^tu^on. To expand be too great, it may also be wise to wait. successfully, the FI should consider how many exis^ng clients might be eligible for agricultural One of the most useful ways to decide whether loans. Expansion into a broader, more diverse to proceed is to determine how long it will take client base can happen once the ins^tu^on is for the agricultural lending product line to more familiar with the region. break even. If the market condi^ons are favorT able, and the FI has suCcient capital available The introduc^on of agricultural lending o-en to sustain the product line un^l predicted means integra^ng a new proUle of target proUtability, these could be good indica^ons to clients, one with diLerent Unancing needs and proceed. more complex business cycles. The choice of target clients should be consistent with the FI’s At this point, the project team will have all the mission, vision, and strategy. Thus the team informa^on required to make the pitch to should carefully consider the FI’s current image senior management and explain why the bank in the market and reTexamine the FI’s original should enter the agricultural lending sector. mission. Although the FI may be able to shi- The team should present a business case for people’s percep^ons by introducing agriculT the pilot phase with a clear value proposi^on, tural loan products, the FI is unlikely to reach a targets on por1olio growth, and deUned levels completely diLerent target audience without of produc^vity for loan oCcers. Deciding not signiUcant marke^ng or reTbranding eLorts. to proceed should not be viewed as a failure since the introduc^on of any new product is a major investment for the ins^tu^on. External GO-NO GO and internal condi^ons must be conducive for Some ins^tu^ons may determine during this an eLec^ve introduc^on. phase that they are not wellTplaced to introT Business Case and ProjecCons for a Financial InsCtuCon in Indonesia Based on the informa^on gathered during the market research and risk assessments, a team from an Indonesian bank decided to focus on Unancing egg, poultry, and dairy producers to to start with. Theseare more sophis^cated sectors and generate daily cash .ows. The team decided to wait before focusing on vegetables and corn, which are very dynamic sectors but which generate more seasonal incomes. To gain management buy in, the team presented informa^on explaining the market poten^al and then described the risks associT ated with each sector. They then stepped through the es^mated por1olio growth and loan oCcer (LO) produc^vity forecasts for the pilot phase. The team assumed that the bank would start with two LOs per branch at nine pilo^ng branches in total. Further, LO - 42 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH produc^vity was projected to scale up over 12 months according to the following levels: one loan disbursed per month per LO during the Urst Uve months of the pilot; two loans disbursed per month per LO from months six to 12; and, three loans disbursed per month per LO from months 13 to 18. The table below shows projected produc^vity per LO at the end of the Urst 12 months. Table 10 – Projected LO Produc5vity During Pilot Year 1 Case Load/LO 12 Por1olio Outstanding/LO $ 37,678 Loans disbursed per LO/month 1 The team projected total agribusiness and rural loans to total just over $675,000 a-er the ini^al 12 months, according to the schedule below. Table 11  Projected Outstanding Loans and Por olio Size of Pilot Targets Number of Number of Months Branches Account O%cers O/S Loans O/S Porolio !$# 1–5 3 6 53 237,138 6–9 6 12 105 425,626 10 – 12 9 18 210 678,205 With this informa^on, the team successfully presented their business case to senior management and received approval to begin planning the pilot. The 12Tmonth pilot allowed the team to thoroughly analyze product adop^on and use in the Ueld and make adjustments to the product terms as necessary. - 43 - Agricultural Lending: A How - To Guide STRATEGY DEVELOPMENT FOR may be more eCcient to enlist the help of PILOT PHASE outside resources, such as local marke^ng Urms to help survey the target popula^ons, or If the project team determines that the FI is a donor agency, such as IFC. Many value chain wellTplaced and that there is enough of a target studies are conducted on various crops in market to pursue, they can begin developing countries around the world. These are publicly the strategy to implement the pilot. DevelopT available and are a great star^ng point for an ing the strategy for the pilot phase can take FI to begin to learn about certain agricultural place a-er geng a clear understanding of the products. But understanding the farmers’ overall agriculture market and the key perspec^ves on Unancial needs and what they economic actors opera^ng within the FI’s expect from a bank is slightly diLerent and target geographical area. more nuanced, and will require oneTonTone interac^ons. The pilot strategy should address certain key features of the pilot program, such as: FIs must take their ^me to inves^gate new markets, but should be careful to avoid “analy( • Finalizing ini^al branch loca^ons and sis paralysis” from informa^on overload. It is delivery mechanisms for tes^ng the new not necessary to speak with thousands of product. farmers in each value chain to gain a full underT • Seng objec^ves and goals that are ambiT standing of their needs and how a bank can ^ous, but also realis^c based on the team’s address those needs. As men^oned earlier, a data and Unancial models. representa^ve sample should consist of around 9 to 12 farmers per crop or sector of varying • Determining what addi^onal investments sizes from around the target geographical are required to pilot the new product. areas. It is likely that one farmer’s challenges Investments would involve training of staL are very similar to his immediate neighbor’s and targeted marke^ng and sales challenges. So interviewing each one is unlikely campaigns. to yield any addi^onal insight and may not be an eCcient use of the FI’s ^me and resources. CHALLENGES AND LESSONS Rather, pick small samples of many agricultural sectors from around the region and infer from LEARNED the data what the representa^ve challenges Perhaps the biggest challenge during the are and how the ins^tu^on could design market research phase is to ensure that the FI agricultural lending products. This process may has enough resources to reach out to target seem expensive or cumbersome. However, if clients in the regions with the highest agriculT the FI decides to con^nue developing a new tural poten^al. Taking the ^me to travel to agricultural product as a result of this research, these regions and seng up quality interviews the informa^on can help with loan assessT with farmers and other value chain actors can ments for the Urst clients. take some ^me and resources. The FI’s team could conduct one or two weeks of market CHECKLIST research with a limited number of interviews (for example, 45 to 60 farmers and 10 to 15 During this phase, the project team should value chain players) to reduce research costs have collected enough data to make an and resource demands. The interview forms informed decision about whether or not to are simple and the bank staL can conduct the proceed with agricultural lending. The team interviews themselves. However, the research should have evaluated the target market and team must be supported by local experts to compe^^ve environment to determine where iden^fy farmer groups and value chain players it would make sense to launch a new agriculT and schedule the interviews. Some^mes, it tural product. The project team should have - 44 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH also collected data from farmers in the target • Has your team completed an analysis of regions to understand their Unancial needs and the compe^^ve environment and target how the organiza^on can meet those needs market? And has it iden^Ued the without taking on excessive risk levels. By geographic region (or regions) that has the combining this data, the project team should largest agricultural poten^al? have an ideal region and a proUle of an ideal target client that they can use to then create a • Has your team inves^gated the best new product. Finally, the project team should branch loca^ons to launch agricultural have worked with the board and execu^ve products or other appropriate delivery management to dra- a business plan and rural mechanisms, such as mobile devices, as strategy for the pilot phase. well as associated costs? The following checklist will help your team • Has the team gathered data on farmers determine whether you are ready to proceed and producers in your target regions and with Phase 3 of the new product development does your team understand their Unancial process: needs? • Has your team iden^Ued any necessary • Has the team developed a business plan addi^onal resources to undertake the and strategy to launch the pilot phase? various components of the market research phase? - 45 - Product Development Phase 3 – Pilot Design P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH Product Development Phase 3 – Pilot Design -er the project team has completed ^on costs collected by contac^ng A market research in the selected region references (buyers and suppliers). and gained a comprehensive underT standing of the poten^al market and client This lending approach requires that loan needs, the team is ready to design the pilot. oCcers have a good understanding of the Now, the project team needs to design and agricultural sector to be eLec^ve. They must implement a business model that will ensure also have the skills and knowledge to analyze costTeLec^ve services in rural areas and a produc^on techniques and interact with thorough screening process to select farmers farmers. The model further recommends that with good repayment capacity and willingness FIs engage with the agricultural sector graduT to pay. A robust lending model to Unance the ally and that they build strategic alliances with agricultural sector should: local players to manage and mi^gate risks. • Capture all income streams for the farm, This third phase is the Urst of two itera^ve iden^fy the frequency of cash .ows, ascerT steps in the pilot process. During this phase, tain the repayment capacity, and assess the project team will dra- the ini^al features technical and managerial skill levels. and characteris^cs of the new product. The team will develop key performance metrics • Reduce credit risks by oLering farmers and conduct extensive training (theore6cal as adequate loan terms and repayment well as 'eld coaching) for loan oCcers. The schedules matching their seasonal team will also support and coach the FI’s staL incomes, irregular cash .ows, and build in in the Ueld with marke^ng ac^vi^es, farm visits occasional grace periods. to collect data, loan analyses, and ini^al approvals. • Incorporate processes to enable crossT veriUca^on of yields, crop incomes, and Addi^onally, during this phase, the team will crop produc^on costs, collected by the need to work with senior management to loan oCcer during farm visits. ensure suCcient Unancial resources to complete the pilot. A robust pilot will require • U^lize objec^ve score systems to es^mate funding to cover the costs of adjus^ng or risk levels of farmers and resul^ng impacts seng up new branches, recrui^ng and trainT on the maximum loan amounts. ing new staL, and conduc^ng marke^ng and promo^on ac^vi^es. • Employ a systema^c and consistent process to crossTverify sales and producT - 47 - Agricultural Lending: A How - To Guide Figure 10 – Phase 3 – Pilot Design Phase 3 Pilot Design Phase 5 Phase 1 Phase 2 Product Launch and PreparaƟon Market Research Rollout Phase 4 Pilot TesƟng and Monitoring Market Feedback The pilot design process will require inves^ng lowTrisk clients Urst. It must outline key in resources to develop the product, set up the marke^ng ini^a^ves to ensure that the target organiza^onal structure to run the pilot, train clientele knows about the availability of the staL, and conduct marke^ng ac^vi^es during new product. pilot implementa^on. At the end of this phase, the FI should have policies describing features PRODUCT TERM SHEET and condi^ons of the agricultural lending product, a strong lending methodology, a trainT The project team, a-er analyses and ing curriculum, and a plan to train loan oCcers. interviews, should construct a reasonable pilot The FI’s business model should gradually product. Table 12 presents a format that can engage with the agricultural sector to target be used to develop this term sheet. Table 12 – Term Sheet Format ProducCon/Pre(Harvest Finance, Post(Harvest Finance, Inventory Product Name Finance, Short(Term Equipment Rentals, Leases, etc. A brief summary of the product, such as target borrowers, loan Descrip^on purpose, and general terms and condi^ons of the loan. Target Market The type of business and ac^vity the product is meant to Unance. • Maximum term of the loan in months or days. • Frequency of principal and interest payments monthly, quarterly, or Repayment Terms at maturity . This could also allow for irregular payment plans ^ed to agricultural sales. Normal interest rate allowed. Interest Rate and Fees Other fees associated with the loan, such as commitment, applica^on, or past due fees. Loan Amount Maximum and minimum loan amounts. This might include: • Minimum amount of experience in ac^vity being Unanced. Eligible Borrowers • VeriUable sales to commercial buyers. • Checking and/or deposit rela^onship with the FI for a minimum period. - 48 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH ProducCon/Pre(Harvest Finance, Post(Harvest Finance, Inventory Product Name Finance, Short(Term Equipment Rentals, Leases, etc. • Average balance of at least x ^mes the monthly interest payment. • Business within x kilometers of branch oCce. Collateral Personal guarantees might be required from all individual borrowers. Other requirements might include: • Crop insurance from an insurer acceptable to the lender Other Requirements if available . • Addi^onal collateral acceptable to the agricultural lending unit. • Electronic payment transfer directly from borrower’s bank account. Some factors in this product design may need • Ini^al eligibility to be revised or modiUed a-er the product is piloted for the Urst ^me. The monitoring and 1. At least three years of experience evalua^on phase (which will be covered in farming in the region Phase 4) is therefore very important. The pilot 2. At least two years of experience in the development phase is designed to be itera^ve crop being Unanced so that if the FI determines that certain features are una2rac^ve to the target market, 3. Percentage of produc^on sold on the they can be tweaked and perfected un^l the market over 60 percent right balance is achieved. The most cri^cal aspects will be aligning repayment terms and 4. Ownership of land; if not, guarantor interest rates with customer needs. By must own land conduc^ng thorough interviews and listening closely to feedback from the poten^al clients, 5. Farm located less than 30 Km from the the FI should be able to design a product that branch and accessible all year round meets customers’ needs. Speci'cally, the prod( uct should oer exibility to match farmers’ 6. Loan amount requested between seasonal cash ows and irregular incomes $3,000 to $50,000 throughout the year. At the same ^me, it must 7. Loan to be used for farming (working consider the ins^tu^on’s cost structure and capital or 'xed assets). legal and regulatory context. • Farm Visit: If the farmer meets the ini^al Customer Screening eligibility criteria, a loan oCcer can Financial ins^tu^ons must focus on visi^ng schedule a visit to the farm. During this farmers with the strongest poten^al for visit, the loan oCcer will inspect the farm successfully applying for loans. . The FI must and Uelds to ensure the size and crop create a set of simple criteria to preTselect informa^on provided on the applica^on is farmers that are likely meet the criteria for accurate. The loan oCcer will also gather receiving a loan. This will help to avoid spendT socioTeconomic data and collect the docuT ing ^me with farmers who would not qualify menta^on required: and ensure an adequate return on investment in developing agricultural lending processes. 1. Client’s socioTeconomic informa^on An eLec^ve preTselec^on system will help increase the produc^vity of loan oCcers. Some 2. Borrower’s capacity to repay examples of selec^on criteria are: - 49 - Agricultural Lending: A How - To Guide 3. Assets and solvency compares crop yields, incomes, and produc^on costs against regional benchmarks. The lending 4. Character references. model is supported by an expert score that • Veri'ca6on of informa6on collected: A-er iden^Ues the risk levels of farmers and the farm visit another staL member will suggests maximum loan amounts based on risk crossTverify the informa^on collected proUles and disposable incomes. Finally, to during the farm visit: determine Unancing needs and repayment schedules, the model prepares a detailed 1. VeriUca^on of references: clients, monthTbyTmonth cash .ow analysis of all farm suppliers, banks and nonTfarm income and expenses. The cash 2. VeriUca^on of u^lity bills, bank .ow worksheet helps determine Unancing accounts, collateral, credit history. needs by iden^fying the months where the most nega^ve cash .ow occurs. It shows when • Loan analysis: The informa^on collected the farmer can repay the loan, based on future from the farm visit is entered into the loan incomes projected in the cash .ows. See appraisal template. appendix H for a more detailed overview of the lending forms and expert score variables. Phase 3 Featured PracCcal Example: IFC lend( ing methodology. The key elements of loan appraisal include the following: • General Client Informa6on: Age, years of AGRICULTURAL LENDING farming experience, years working in the METHODOLOGY region, educa^onal level, house ownerT ship, household size, and number of workT Employing a robust lending methodology will ing members. This informa^on is also used help the FI properly evaluate poten^al clients to es^mate the socioTeconomic scores of and will ensure all necessary informa^on is the client. captured. Many FIs already have proprietary • Capacity to Repay: The analysis takes into lending tools and methodologies developed for considera^on three sets of data to their current business units. However, there es^mate the borrower’s capacity to repay: are several important areas in agricultural lending that FIs should ensure are part of their 1. Past 12 months’ farm income (for lending processes. A-er reviewing the material example, hectares planted and crops in this sec^on, FIs should be able to determine and livestock sold). This informa^on whether it would be more helpful to introduce helps determine the historical crops or a new methodology, update the current livestock volumes produced by the methodology with the necessary adjustments, farmer, and if planned produc^on or use one of the systems already developed. during the dura^on of the loan is reasonable. The Weighted Total Yield This sec^on discusses a methodology, (second column from the right) is the developed by IFC, which comprehensively average of two ^mes the minimum analyzes farmers’ risks and incomes. This yield, plus the last yield, plus the model was developed by combining and maximum yield, divided by four. reUning successful lending models previously design and implemented by Procredit15, the 15 Introducing Rural Finance into an Urban Micro'nance Frankfurt School of Finance & Management16, Ins6tu6on: The Example of Banco Procredit, El Salvador. and ACDI/VOCA.17 Juan Buchenau and Richard L. Meyer. 16 Agricultural Loan Evalua6on System (ALES). Frankfurt The model iden^Ues all farm and nonTfarm School of Finance & Management. incomes during the dura^on of the loan and 17 Pro't Planer Farm Cash Flow Analysis Tool, ACDI(VOCA. - 50 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH Last Year Yields and Income (Crops produced and harvest in the last 12 months) Estimated Yields Crops Cultivated Area Units Weighted Total Yield Production / Ha Date Last Min Max Tomato 4.00 220,000 192,000 240,000 kg 211,000 52,750 Corn 2.00 16,000 12,000 18,000 kg 14,500 7,250 - - - - - - 2. Projected farm income during the duT yields and average crop prices (the ra^on of the loan for example, same approach used for weighted hectares to be planted and crops and yields is used to es6mate average crop livestock to be sold to es^mate future prices). Also, it deducts family crop income, the loan appraisal form consump^on and a percentage of crop calculates conserva^ve average crop losses. Projected Farm Income next Cycle (During the loan duration) Total Selling Price Family Weighted Crops Cultivated Area Units Total Prod % Losses Production Total Income Date consumption Sold Last Min Max Total Yield Tomato 4.00 Kg 211,000 5% 200,450 1,550 1400 1800 1,538 308,191,875 Oct Corn 2.00 Kg 14,500 500 3% 13,565 2,550 2200 2700 2,413 32,725,563 Jul - - - - - - - - - - - - - - - TOTAL INCOME Rp 340,917,438 3. Other farm income, such as livestock detailed descrip^on of the farmer’s skill or dairy produc^on, is also considered level scores, see appendix H. when applicable. • Other Family Income and Expenses: The • Buyers: A-er es^ma^ng the main farm inT income analysis includes other nonTfarm comes, iden^fy main buyers of the crops. income to understand the concentra^on These buyers will be contacted and used as and risk exposure of the farmer. Family references to verify the sales amounts reT expenses and other debt obliga^ons are ported. also used to complete the assessment of the repayment capacity of the farmer. • Farm ProducCon Costs !for both crops and livestock#: The produc^on costs collected • Analysis of Client’s Assets and LiabiliCes: should be very detailed, and should be This sec^on of the loan appraisal form iden^Ued for each crop. This informa^on focuses on farm size, asset composi^on, will enable loan oCcers to understand the and capital structure. Here, the loan technical level of farmers and how knowlT oCcers should iden^fy the inputs, agriculT edgeable farmers are about prices of tural and livestock inventories, tools and inputs and crop yields and prices. ProducT machinery. ^on costs are classiUed as input costs, labor costs, service costs, and opera^onal • Farm CharacterisCcs and PotenCal: In this costs. sec^on, the objec^ve is to understand the farm characteris^cs and agricultural potenT • Technical Skill Level: A-er analysis of the ^al by analyzing the size of the farm, soil produc^on costs, yields, and agricultural characteris^cs, land plot slope, access to prac^ces used by the farmer, the loan irriga^on, and an^cipated rainfall. If the oCcer can assess the technical level of the farmer has more than one plot of land, farmer based on inputs used, agricultural each plot should be captured separately. prac^ces, and the accuracy and level of The condi^on of the land will also be used detail of the informa^on provided. For a to es^mate scores. - 51 - Agricultural Lending: A How - To Guide SUMMARY FARM AND FAMILY INCOME AND PRODUCTION COSTS Total Farm Income during the duration of the loan Total Farm Income Rp 340,917,437.50 Income / Stored Crops Rp 1,447,500.00 Others Farm Income TOTAL FARM INCOME Rp 342,364,937.50 Production Costs Total Inputs Rp 117,692,000.00 Labors Rp 70,920,000.00 Services Rp 13,400,000.00 Operations Rp 5,000,000.00 TOTAL PRODUCTION COSTS Rp 207,012,000.00 NET FARM INCOME Rp 135,352,937.50 Other Income and Household Income / Year Total Salaries & Business Rp 66,000,000.00 Family Expenses Rp 44,300,000.00 Current Debt Payment Rp 43,888,890.00 DISPOSABLE INCOME FARM & FAMILY Rp 184,823,110.00 • LiabiliCes: This sec^on looks at the indebtT the data collected during the farm visit. If edness level of the farm before the loan is there are discrepancies, adjustments can disbursed and how much addi^onal debt be made in the yellow column.18 the farmer can take. The liabili^es are diT vided into shortTterm and longTterm liabilT • Cash Flow Analysis and Loan Design: Once i^es. The original amount, loan use, adjustments to data collected during the current balance, installment amounts, and farm visit have been made; loan oCcers frequency of payment are recorded. enter other family income and family Installments are also included in the cash expenses in the monthly cash .ow sheet. .ow analysis to es^mate the farmer’s Here, the credit commi2ee can analyze in repayment capacity. Collect the last payT detail the monthly cash .ows and UnancT ment stub or proof of payment from the ing needs of the farmer, which is farmer’s FI and request contact persons in represented by the most nega^ve monthly the respec^ve FIs to verify the informa^on cash .ow throughout the produc^on cycle. provided. By analyzing cash .ows, the credit commitT tee can also design the loan term, grace • Comparison to Regional Benchmarks: The period, and payment structure. For examT informa^on collected during the farm visit ple, if the most nega^ve cash .ow occurs is then compared to regional benchmarks. in month 8, then that is the amount that This informa^on can be adjusted if necesT the farmer will need to Unance his ac^viT sary to have consistent and reasonable ^es. If that farmer an^cipates income from assump^ons to es^mate net farm income and repayment capacity. The Urst column shows the produc^on costs of the regional benchmark and the yellow column shows 18 Pro't Planner Tool. ACDI/VOCA. - 52 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH Select Crop Below 159-Tomatoes-Fresh-Commercial Plant Date Jul-15 Min 1 Timing Independent Max 20 Area 4 Ha Region Malang Value / Unit Area Item Description Total Est. Adj. Fertilizer 14,700,000 11,100,000 44,400,000 Seed 2,500,000 2,600,000 10,400,000 Crop Protection Product 4,950,000 4,240,000 16,960,000 Field Materials 10,150,000 9,140,000 36,560,000 - Subtotal Input Costs 108,320,000 Preparation & Planting 5,600,000 2,680,000 10,720,000 Maintenance & Weeding 6,200,000 16,150,000 64,600,000 Harvest 3,600,000 3,750,000 15,000,000 - - - - Subtotal Labor Costs 90,320,000 Preparation & Planting 1,503,000 1,500,000 6,000,000 Maintenance & Weeding - - Harvest - - Transportation 1,400,000 1,400,000 5,600,000 - - Subtotal Service Costs 11,600,000 Production - - Packaging - - Utilities - - Rent & Fees 5,250,000 21,000,000 - - Subtotal Operations Costs 21,000,000 Yield Sold Kg 50,540 50,113 200,452 Price per Unit 1,600 1,538 1,538 Total Revenue 308,295,176 Total Expenses 231,240,000 Nest Profit 77,055,176 - 53 - Agricultural Lending: A How - To Guide agricultural ac^vi^es in months 5, 9 and farm, the asset alloca^on, liabili^es, and 10, then those can be set as the three capital structure of the farm. This informaT installments to repay the loan. ^on will determine the solvency and liquidT ity of the farmer to absorb more debt. On • Credit Commiee and Loan Approval: The the right, using the informa^on entered in credit commi2ee will review two docuT the preceding tables, the tool calculates ments that summarize the informa^on key Unancial ra^os and analyzes the collected. The Urst document is the cash farmer’s risk proUle. The tool also analyzes .ow analysis and the second is the credit the strength of these metrics using the commi2ee summary sheet (below). This score analysis from appendix H. The score document shows the farm income and system suggests a maximum loan amount expenses as well as nonTfarm income and based on the risk level of the farmer and family expenses on the le- side of the the farmer’s disposable income. LowTrisk sheet. The disposable income, at the farmers qualify for loans up to 70 percent bo2om of this table, determines the of their disposable income, while mediumT repayment capacity of the farmer. Below risk farmers qualify for loans up to 30 the disposable income is the balance sheet percent of their disposable income. of the farm, which shows the size of the FARM INCOME Financial Ratios Level Ideal Farmer Result Farm Income Rp 340,917,438 Liquidity Ratio < 60% 4.2% Strong Stored Crops Rp 1,447,500 Cumulative repayment capacity ratio > 1,5 3.00 Strong Other Farm Income Rp - Debt ratio including the loan < 60% 8.95% Strong Total Income Rp 342,364,938 Operational Efficiency < 60% 60.47% Weak Loan to Value Ratio (LTV) < 70% 41.67% Strong Production Costs Inputs Rp 117,692,000 Farmer Risk Profile Score Weight Classification Result Labors Rp 70,920,000 Farm Conditions 18 18% 3.24 Good Services & Operations Rp 18,400,000 Technical Level Farmer 19 18% 3.42 Average Total Production Costs Rp 207,012,000 Crop Diversification Ratio 6 15% 0.90 Weak Farm's Financial Strengh 17 20% 3.40 Strong NET FARM INCOME Rp 135,352,938 Farmer's Character 13 14% 1.82 Good Salary and Business Rp 66,000,000 Farmers's Socio Economic 18 15% 2.70 Average Family Expenses Rp 44,300,000 Total Score 91 100% 15.48 68.94% Current Debt Payment Rp 43,888,890 Max 132.00 Disposable Income Rp 113,164,048 FARMER RISK PROFILE PERCENTAGE RECOMMENDATION BALANCE SHEET FARM Very Low Risk >80% Approve up to 70% of disposable Income Cash & Account Receivables Rp 80,000,000 Low Risk 65%- 80% Approve up to 50% of Disposable Income Inventory - Agriculture Rp 117,600,000 Medium Risk 50%-65% Review and approve up to 30% of DI Inventory - Livestock Rp 43,200,000 High Risk < 50% Reject TOTAL SCORE 68.94% APPROVED Current Assets Rp 142,800,000 Land and Building Rp 528,000,000 Disp Income / year Rp 113,164,048 Cycles/year TOTAL ASSETS FARM Rp 911,600,000 Disp Income / Cycle Rp 113,164,048 1 Short Term Liabilities Rp 10,000,000 Long Term Liabilities Rp 15,000,000 Int rate interest / year Rekomendasi TOTAL LIABILITIES Rp 25,000,000 Max Loan Proposed Rp 56,582,024 Rp - 50.0% TOTAL EQUITY FARM Rp 886,600,000 Load Proposed by LO Rp 50,000,000 Rp - Other Family Assets Rp 390,000,000 Other Family Liabilities Rp 42,000,000 Use of the Loan Family Equity Rp 348,000,000 If the production fails, how could you pay back the loan? Sell the car KEY BUSINESS STRATEGIES FOR Target Businesses in Rural Areas First: Look to AGRICULTURAL FINANCE priori^ze Unancing businesses in rural areas, such as crop traders, input and service The implementa^on of the pilot in the next providers, and crop processors. phase will require Une tuning and balancing several important components: Select Farmers with Lowest Risk: Priori^ze funding for farmers with the lowest risk levels. Agricultural PotenCal: Serve areas with strong Look for farmers with stable monthly incomes agricultural poten^al Urst. Look for crop Urst, and then expand the por1olio to higher diversiUca^on, mul^ple crops seasons, access risk farmers with seasonal incomes. to irriga^on, and access to diverse markets. - 54 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH Build Strategic Partnerships: Risks can be explaining the new services oLered by the FI to mi^gated by leveraging the knowledge of local them. players to form strategic partnerships with larger agricultural industries, technology The loan oCcer could also request to physically transfer agencies, or insurance companies. meet the group of farmers at an associa^on mee^ng. During this mee^ng, the FI can use Risk Assessment: Develop a strong and abbreviated customer segmenta^on ques^onT customized risk assessment process with naires to iden^fy the characteris^cs of the updated loan applica^on forms for agricultural region, such as the number of farmers in that clients. Use scoring models to evaluate the par^cular area, the main crops, the biggest strengths of crops and livestock and analyze challenges throughout the produc^on, and cash .ows closely. harves^ng and marke^ng processes. The loan oCcer should listen carefully and iden^fy the Product Design: Design products tailored to main challenges, which could imply Unancing farmer needs, including seasonal payments, opportuni^es for the FI. irregular installment amounts, and grace periods. The informa^on gathered at these mee^ngs will help the loan oCcer propose speciUc loan Branch LocaCon: Leverage a rural branch products that Ut the needs of farmers. loca^on to reduce opera^onal costs. Addi^onT Mee^ngs with farmer associa^ons should be ally, be sure to create working regions for each organized ini^ally on a weekly basis. The loan oCcer and use technology, such as mobile informa^on collected should be stored in a devices, to facilitate ease of payment, when worksheet summarizing market poten^al, possible. number of farmers, and Unancing needs iden^Ued. A-er the mee^ngs, the FI can more Diversi caCon: Make sure the FI’s por1olio is easily iden^fy the most interested farmers and reasonably diversiUed. This guide recommends schedule farm visits to con^nue with the that a maximum of 30 percent of the por1olio applica^on process. should be in agricultural loans. Incen^vizing loan staL to proac^vely organize Loan O%cer Tasks: Rural loan oCcers should mee^ngs with farmer groups will facilitate manage both agricultural loans and commerT fulUllment of the marke^ng plan. Loan staL cial loans. By doing this, each loan oCcer’s must appreciate the advantage of targe^ng a produc^vity is maximized, the seasonal new demographic that it had previously not demand for agricultural loans can be balanced targeted before. For example, the bank may with demands for commercial loans at other require loan staL to meet with at least 25 ^mes of the year, and each loan oCcer’s farmers each month. Evidence of such meetT por1olio risk can be diversiUed. ings may come in the form of weekly marke^ng reports that summarize where the mee^ngs MARKETING AGRICULTURAL were conducted, how many farmers a2ended, LENDING PRODUCTS what the main Unancing needs of the group were, and how many farmers were interested Once the product term sheet is developed and in taking it further. approved by senior management, the project team must organize a marke^ng campaign to The procedures for marke^ng to agricultural a2ract new clients. Marke^ng in rural areas businesses will depend on the size of the requires a slightly diLerent approach than business. Some^mes it is more eLec^ve for marke^ng in urban areas. In rural areas, loan branch managers or middle managers to oCcers may Und it useful to contact farmers’ organize and meet agricultural coopera^ves associa^ons by contac^ng group leaders and and enterprises to build ins^tu^onal - 55 - Agricultural Lending: A How - To Guide rela^onships and to explore areas of on how to track performance metrics is given collabora^on between the FI and those in Phase 4. players. Once the contacts have been estabT lished and the objec^ves deUned, loan oCcers KEY STAFF CAPABILITIES should start marke^ng agriculture Unancial products to the farmers linked to those There are speciUc skills that each branch companies and coopera^ves. manager and each new lending oCcer should possess when building up the agricultural The bank may already have a wealth of agriculT lending team. These skills will help ensure that tureTrelated businesses and/or their employT poten^ally successful applica^ons are ees as depositors. Exis^ng depositors are forwarded to the credit commi2ee for Unal lowThanging fruit that can be harvested most approvals. rapidly to build the agricultural por1olio. As soon as the agricultural sector is targeted and Rural and Agricultural Lending O%cers this new por1olio is opened, the bank’s Building up ins^tu^onal capacity to eLec^vely interest in Unancing targeted agricultural lend to agricultural clients is a necessary ac^vi^es can be communicated to exis^ng prerequisite to launching an agricultural lendT depositors to make them aware of new loan ing product. The decision to train agricultural products designed to serve agriculture. lending staL or to recruit from outside the ins^tu^on depends on the educa^onal and professional background of current staL and its PERFORMANCE METRICS capacity to develop new skills through training. It is important for the project team to set clear To make this decision, consider the proUles of objec^ves for the pilot so that it can measure the exis^ng group of loan oCcers and the local success before a full rollout. Metrics should be labor market. both quan^ta^ve and qualita^ve. Quan^ta^ve metrics could include the total number of Agricultural lending requires an inTdepth agricultural loans disbursed, loans disbursed understanding of rural clients, par^cularly per rural loan oCcer and per branch, average when deUning farmer risk proUles and evaluatT loan size disbursed, and outstanding loans per ing their technical skill levels. On the other branch and per rural loan oCcer. Addi^onal hand, the basic Unancial principles required to metrics could include the number of rural loan analyze a loan are fairly standard and easier to oCcers per branch and number of branches learn. It is easier for an agronomist to learn oLering the agricultural lending product, as Unancial analysis than for a business profesT well as the impact of the product on the sional or an accountant to learn agronomy and bo2om line of the FI. crop produc^on techniques. FIs may Und it more costTeLec^ve to hire agronomists and Qualita^ve metrics could include staL and train them on Unancial analysis than to train client percep^ons or assessments of the ease exis^ng staL on intricate agronomic principles. of pung processes in place. The actual targets should diLer from ins^tu^on to ins^tu^on To ensure agricultural loan oCcers maintain depending on the size of the FI, there is no adequate levels of produc^vity, FIs should also perfect benchmark. However, regardless of Unance other economic ac^vi^es in rural areas. size, the project team should have a set of key Agriculture is seasonal, and during some performance metrics approved by senior months of the year, there may be li2le or no management against which they can track their demand for agricultural loans. Loan oCcers progress during the actual pilot. Targets should must have diversiUed por1olios, where agriculT be set with the expecta^on that learning and tural loans represent at least 20 percent and at eCciency will improve over ^me. More detail most 50 percent of their loan por1olios. - 56 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH Working areas must be created for urban and agricultural lending. Branch managers will need agricultural loan oCcers to reduce compe^^on to become more involved in the assessment among them to get the same clients. Urban and monitoring of farmers, in analyzing their loan oCcers should focus on urban and suburT Unancial data, and assessing their technical ban areas only, while agricultural loan oCcers skills. The ability of branch managers, who should create working regions outside the city o-en head credit commi2ees, to undertake and work those regions on a weekly basis. sound loan assessments is pivotal to the Within their regions, agricultural loan oCcers success of agricultural lending. should market loans to traders, manufacturers, and service providers apart from farmers and The new responsibili^es for branch managers producers. Working areas must be designed would include: early in the process to avoid compe^^on and • Monitoring of new products that may tensions among team members. require addi^onal analyses. When building up agricultural lending staL, • Implemen^ng new repor^ng requireT management should look for some typical ments: crossTchecking and analyzing to a2ributes that characterize eLec^ve agriculT ensure accurate data collec^on. tural lending oCcers: • Ensuring staL have the appropriate analy^T • Educa^onal background in the following cal capacity and tools. areas: • Maintaining an understanding of local o Agronomy agricultural markets and strategic planning o Farm management for growth and expansion. o Sales and marke^ng of agricultural • Building strategic alliances with value chain inputs players. o Training and technology transfer to • Fostering collabora^ons with technology small farmers. transfer ins^tutes. • Basic understanding of Unancial, economic • Promo^ng communica^on and informaT or accoun^ng principles (some banking ^on .ows, both externally through marketT experience welcome, but not required). ing and through internal communica^ons. • Familiarity with agricultural markets. Branches will be carefully selected for rolling out the new agricultural lending product, • Open to frequently traveling to the Ueld based on the market research in the previous (60 percent ( 70 percent of the 6me). phase. It will be possible to oLer targeted training programs to build necessary staL skills • Able and willing to ride on a motorbike. in these few branches. As the lending program expands, the ins^tu^on can accordingly train • Willing to work in the Ueld under the sun, more staL. dust, and rain. • Excellent communica^ons skills and AGRICULTURAL LENDING STAFF a2en^on to details. TRAINING Branch Manager ResponsibiliCes Exis^ng and incoming staL must be trained on proper agricultural lending methodologies and The responsibili^es of branch managers will procedures to ensure success of the pilot and shi- substan^ally with the introduc^on of - 57 - Agricultural Lending: A How - To Guide launch of the new product. Loan oCcers, Analy^cal tools and approaches used by the project management, and credit commi2ee ins^tu^on should be explained, prac^ced members all need to be trained on the speciUcs through exercises (for example, preparing a of agricultural lending. The agricultural lending balance sheet and income statement for an project manager should coordinate with the agricultural business), and tested. Prepara^on human resources department in developing for Ueld training should be done through role and running the training sessions. The project playing and processing of “mock” client appliT leader should also coordinate the development ca^ons. of training materials. Several training curricula on agricultural lending have already been By the end of the theore^cal training, trainees developed by interna^onal organiza^ons such should be comfortable with calcula^ng as IFC; the project manager may start by seekT repayment capaci^es and the Unancial ra^os ing assistance from outside sources to leverage used for loan decisions. A test to measure the exis^ng exper^se and materials. trainees’ comprehension is conducted to improve the training and screen out unsuitable Successful training programs for agricultural individuals before they move into the Ueld. loan oCcers include theore^cal, inTclass (1(2 Screening prospec^ve staL avoids poten^ally weeks) and Ueld coaching components (up to problema^c contacts with clients, and also 6 weeks) with managers and experienced loan limits costly ^me investment involved in Ueld oCcers. training. Theore^cal training should cover: Field training involves coaching new loan oCcers in conduc^ng client interviews, observT • The bank’s commitment to agricultural ing indicators about the household or farming Unance and how it Uts within its mission business that might in.uence loan assessment, and capturing key socioTeconomic informa^on • Crop produc^on cycles and benchmarks for Unancial analysis. It also involves illustra^ng for target value chains ways to ensure crossTchecking and verifying • Agricultural risk and rural lending principles accuracy of informa^on. • Es^mates of past and future agricultural During Ueld training, trainees are o-en revenues mentored by an experienced trainer or loan oCcer in conjunc^on with the branch manager. • Assessments of farm assets and liabili^es It is an essen^al component of the training, and therefore, opera^ons and human • Documenta^on of crop income and resources teams must allot adequate ^me and business expenses staCng to coach of trainees. • Cash .ow analysis and loan structuring The Ueld training covers such subjects as: • Credit assessment, analysis, and approval • Group mee^ngs with farmers for research criteria and marke^ng ac^vi^es • Descrip^on of the new product and how to • Farm visits and data collec^on structure appropriate loans • Loan appraisal and data veriUca^on • Aspects of customer service • Loan approval processes • Marke^ng strategies in rural areas • Communica^ng decisions and next steps • Por1olio monitoring in rural areas. to applicants. - 58 - P,+D CT D66L+P6)T PHA6 2 – A, 6T ,66A,CH At the end of the training program, new loan • Have you deUned the key characteris^cs of oCcers should be familiar with all processes the new product, drawn up a term sheet, associated with lending to new agricultural and got the new product approved by customers. They should be able to source new senior management? clients, interact with them in produc^ve ways, gather informa^on through interviews, and • Have you discussed and determined goals move applica^ons through the approval for the pilot branches? process. New loan oCcers may require some • Have you developed a training curriculum prac^ce to be able to iden^fy produc^ve and support materials? clients, so the training is crucial for the ul^mate success of the agricultural por1olio. • Have you trained loan oCcers involved in the pilot on the diLerent aspects of the CHECKLIST lending technology such as informa^on The primary goals during this phase are to iron collec^on in the Ueld, loan assessment, out the Unal details of the pilot program, create loan approval, and arrears monitoring? an outline and term sheet of the new product • Have you established clear performance that includes key parameters and marke^ng targets for loan oCcers? plans, and train staL on agricultural lending. • Have you prepared a marke^ng plan to The following checklist will help determine if reach the Urst clients? you are ready to con^nue to Phase 4 of the new product development process. • Have you implemented and adjusted lending policies, if necessary? - 59 - Product Development Phase 4 – Pilot Testing and Monitoring P,+D CT D66L+P6)T PHA6 4 – PIL+T T6TI)G A)D +)IT+,I)G Product Development Phase 4 – Pilot Testing and onitoring -er the project team has completed the risk analysis, produc^vity of the loan A design of the pilot product and deterT oCcers, and the eLec^veness of the marke^ng mined what the pilot program will look strategies. Also, the team will assess how well like, the team is ready to begin pilot tes^ng and the new product is received and used by the monitoring results. This fourth phase is the target clientele. Depending on how the pilot second of the two itera^ve steps in the pilot rates on the preTdetermined performance process. During this phase, the project team metrics from Phase 3, the product may need to will begin the pilo^ng process and monitor the return to Phase 3 to be adjusted and rolled out pilot’s opera^onal performance, the quality of again. Figure 11 – Phase 4 – Pilot Tes5ng and Monitoring Phase 3 Pilot Design Phase 5 Phase 1 Phase 2 Product Launch and PreparaƟon Market Research Rollout Phase 4 Pilot TesƟng and Monitoring Market Feedback The pilot tes^ng phase is an opportunity to might need to pilot test the product and tweak oLer the product to a sample group of clients the services for a year or more before sa^sfacT to determine whether these customers need, tory results are obtained. and will use the product. The results of this phase will help determine whether demand AGRICULTURAL LENDING exists for the new product, what modiUca^ons or changes to the terms and condi^ons are PROCESS needed, and what features or processes need FIs beginning the pilot rollout for their new adjustment. The ^me required for the pilot will agricultural products, may Und it useful to reT depend on both internal and external contexts view in detail speciUc steps of the lending of each ins^tu^on. When condi^ons are process, from iden^Uca^on of new clients to par^cularly favorable the pilot may last only monitoring and repor^ng. FIs should ensure around six months. Favorable condi^ons that each loan oCcer and member of the include when a team has strong leadership or credit commi2ee works through this process the product is widely accepted. With less favorT to ensure that each loan is handled eCciently able condi^ons, however, the project team and analyzed correctly. The steps outlined below take 15 days in all. Depending on the exT - 61 - Agricultural Lending: A How - To Guide per^se of each FI, this process may take longer, 2. VeriUca^on oCcer meets guarantors and especially if the credit commi2ee is not located checks collateral (Day 5). at the branch or if it only meets periodically (for example, once a week). 3. Loan oCcer and agriculture director iden^fy which outstanding issues remain During ini^al stage of iden^fying new and decide whether to con^nue with this customers, the FI will explain the product to client (Day 5). new clients and make preliminary decisions on 4. VeriUca^on oCcer makes followTon site whether to con^nue with the rest of the analysis. visit to the farm to inspect farm premises, 1. First client contact – screening with loan inventory, livestock, and internal books oCcer (Day 1). (Day 6). 5. Loan oCcer analyzes Unal cash .ow, 2. Informa^on session – loan oCcer informs income statement, and balance sheet client about agriculture product (Day 1). prognosis; structures the loan accordingly; 3. If the loan oCcer determines that the and completes analysis, writeTup, and Unal client has a qualifying project, he/she documenta^on check (Day 7). assists the client in comple^ng an agriculT 6. Loan oCcer and lawyers review Unal ture loan applica^on form (Day 1). documents and forwards loan memoranT dum to branch manager (Day 7). 4. Loan oCcer opens a client Ule (Day 1). 7. Branch Manager reviews and provides 5. Loan oCcer adds client to agriculture approval for submission to agriculture pipeline report (Day 1). credit commi2ee (Day 8). 6. A-er comple^ng loan applica^on, In this third phase, the credit commi2ee will borrower gives documents (collateral, either give its Unal approval and disburse the references) to loan oCcer (Day 2). loan or reject the loan. 7. Loan oCcer assigns a day to meet the 1. Loan oCcer submits loan applica^on to client onTsite to get more detailed credit commi2ee (Day 9). informa^on to complete the loan assessT 2. If approved, commi2ee signs oL on loan ment forms described in the previous approval form; if rejected, client is chapter (Day 2). provided with a list of deUciencies and can 8. Loan oCcer carefully examines all resubmit when these are addressed documents related to collateral, paying (Day 9). par^cular a2en^on to the status of 3. Loan oCcer informs client of loan decision inventory land records, coordina^ng with (Day 10). legal staL and government as necessary 4. Loan oCcer requests any addi^onal (Day 3). documenta^on required to fulUll condiT The client’s informa^on and credit history is ^ons and for closing (Day 10). analyzed in great detail in the second stage. 5. Opera^ons oCcer arranges collateral registra^on and insurance documenta^on 1. VeriUca^on oCcer conducts due diligence with local and/or district government by carrying out reference checks of (Day 11). suppliers, customers, and, where possible, the bank records of customer, as well as 6. Opera^ons oCcer prepares loan/collateral checking market and compe^tors (Day 4). agreements based on credit commi2ee decision (Day 12). - 62 - P,+D CT D66L+P6)T PHA6 4 – PIL+T T6TI)G A)D +)IT+,I)G 7. Opera^ons oCcer ensures that all 11. Client and guarantors sign documentaT disbursement condi^ons have been met ^on (Day 14). (Day 13). 12. Loan oCcer provides repayment schedule 8. Loan oCcer walks client through disbursal to client (Day 14). of loan proceeds at the branch (Day 13). 13. Teller disburses loan to client (Day 15). 9. Opera^ons oCcer follows through on fulUllment of all condi^ons of loan While some of these steps might require more disbursement (Day 13). than one day, a loan can be disbursed within a few weeks of the applica^on. To summarize, 10. Rela^onship manager checks all documenT the processes of lending to agricultural clients ta^on and condi^ons and signs approval can be broken down into three steps as seen in form (Day 13). Ugure 12. Figure 12 – Lending Process for Agricultural Clients Loan Analysis Farmer completes loan Review financial ratios application Analyze farmer's risk profile Due diligence of references Loan officer analyzes all and business relationships Review repayment capacity pertinent documents Analysis of cash flow and Review investment plan Initial approval for further collateral arrangements Assess guarantees analysis Verify farm conditions through on-site visit Initial Contact Loan Approval While the pilot test is running, the project team • Other repor^ng as determined by bank. can also prepare for analysis of the pilot’s results and conduct some preliminary monitorT The team should conduct weekly and monthly ing and evalua^on. Doing this before the pilot evalua^ons of the en^re pilot por1olio during is complete allows the team to be2er prepare the Urst six months, evaluate diLerent types of to either move forward with implementa^on clients, and record both complaints and or conduct addi^onal pilots. These are the posi^ve feedback. Preliminary monitoring and areas to follow up: evalua^on should allow the team to do the following: • Loan oCcer and client agree to monitoring schedule (As necessary) • Review internal loan approval and risk management systems • Monitoring visits to client Monthly • Monitor levels of staL knowledge • Agriculture updates monthly report (Monthly) • Evaluate customer service • Loan oCcer updates branch manager on • Gauge the eLec^veness of marke^ng and problem loans (As necessary) communica^ons. - 63 - Agricultural Lending: A How - To Guide Reviewing all of these on an ongoing basis monitoring and evalua^on should also include helps the team iden^fy issues and problems some of these following key qualita^ve items: and improve the processes as the pilot proT gresses. • Monitor the lending process quality at all three levels: ini^al contact, loan analysis, and loan approval; TRACKING PERFORMANCE METRICS • ReTassess the technical proUciency levels Monitoring and evalua^on should take place of the loan oCcers par^cipa^ng on the throughout pilot implementa^on. The goal of pilot team; this step is to analyze the actual performance • Analyze product acceptance by clients; of the pilot against the targets deUned in Phase 3 and make any necessary changes before the • Talk to staL or hold informal focus groups product is rolled out across the organiza^on. It to evaluate the level of sa^sfac^on with is much easier to make changes and test them the product; throughout the pilot, so it makes sense to take the ^me to get the pilot right. Some key • Check for product marke^ng consistency performance metrics that the team should across loan oCcers and branches; track include: • Discuss any necessary product adjustT • Size of total agricultural por1olio outstanding; ments with pilot team; and, • Percentage of por1olio that is at risk (PAR) • Design and monitor the necessary adjustT – the total value of loans outstanding that ments of the diLerent areas have one or more installments of principal past due for more than 30 days, or 90 days; If the FI does not have an ongoing customer sa^sfac^on program, the project team must • Loan oCcer produc^vity, such as loans conduct research with individual loan clients to disbursed per oCcer each month; understand how they perceive the new product and to evaluate their level of sa^sfacT • Loans outstanding per loan oCcer ^on with the product and suggested altera^ons. Qualita^ve research with current • Total agricultural por1olio as a percentage customers will give the team a sense of how of the ins^tu^on’s total por1olio; sa^sUed customers are with the product and • Average loan size for agricultural loan their response to the marke^ng ini^a^ves. products; Qualita^ve research with poten^al customers will inform the team of any barriers customers • Cycle ^me – the total number of days from have against borrowing from the FI and why ini^al contact to loan disbursement; and, marke^ng ini^a^ves have not compelled them to take advantage of the new product. • Customer sa^sfac^on level and demand for the agricultural loan product. Upon comple^on of the pilot, feedback should be collated and wri2en up into a pilot For sample performance reports that may help evalua^on report that outlines the actual the project team track these metrics, see versus target metrics, key lessons learned, Appendix I – Sample Performance Reports. outstanding issues and recommenda^ons. This should be used for any further pilots, as well as Beyond collec^ng quan^ta^ve data on the for developing the plan for rolling out the numbers and amounts of loans outstanding, product across the ins^tu^on. - 64 - P,+D CT D66L+P6)T PHA6 4 – PIL+T T6TI)G A)D +)IT+,I)G CHALLENGES AND LESSONS described above (further exhibited in appen( LEARNED dices H and I), the easier and more costT eLec^ve it will be to evaluate client data. A major challenge faced by FIs during this Microso- Excel can be an especially useful tool phase is the lack of technical and analy^cal to increase the reliability of the process. By skills in their agricultural loan oCcers. Many FIs building in automa^c calcula^ons, the chances face this problem when they begin inves^gatT of errors is greatly decreased. Automa^on can ing expansion into agricultural markets. also increase eCciency and support faster Lending to the agricultural sector has many por1olio growth, as well as improve loan appliT nuances and risks associated with it, which are ca^on assessment. absent in the commercial sector. For this reason, this guide stresses the importance of Addi^onally, the uptake of the new product crea^ng a robust and detailed training curricuT among target communi^es can present a lum (including extensive 'eld coaching) to build challenge to some FIs. Having a new product on the skills that loan oCcers have already with .exible repayment terms linked to cash developed working with the commercial sector. .ows can be a2rac^ve to rural farmers. By layering on the new analy^cal techniques However, FIs need to ensure that target and appraisal processes for the agricultural customers know the product is available and sector, the FI can more eLec^vely develop how it can beneUt them directly. Holding meetT strong agricultural lending oCcers. ings with key farmer associa^ons is a great way to get the FI in front of target customers, but Another key challenge faced by many FIs at this some^mes FIs need to go even further with stage is the structuring of an eLec^ve marketT their marke^ng. Some^mes, something as ing strategy. This can be diCcult when targetT simple as incorpora^ng images of the target ing one geographic area with poten^al clients clientele in marke^ng materials can help that are spread over a large territory. For this overcome the mistrust that some farmers have reason, this guide recommends Urst focusing of FIs and their presump^on that FIs are not on exis^ng clients at the branches selected as interested in serving them. pilot sites. There are likely exis^ng clients who par^cipate in agricultural ac^vi^es, who could A strong customer service orienta^on can also use addi^onal Unancing to bolster their have a posi^ve impact on customers adop^ng businesses. Reaching out to these clients to the product. FIs can compete eLec^vely with adver^se the new product can be an eLec^ve subsidized credit from ins^tu^onal players and way of spreading the news about the new diLeren^ate their oLerings among themselves oLering. Addi^onally, using technology, such as by providing rapid loan processing and targeted SMS campaigns to reach exis^ng disbursement, personal a2en^on to clients, clients in the pilot region, may yield addi^onal customiza^on of products, terms and services clients. to match client needs, and nonTUnancial services. Financial ins^tu^ons must also collect reliable quan^ta^ve and qualita^ve data on a ^mely basis. Prudent agricultural lending requires the collec^on and analysis of a signiUcant amount of data on clients, produc^on, and prices. IFC has seen FIs encounter this challenge in numerous situa^ons in its work suppor^ng introduc^on of agricultural lending around the globe19. The more FIs can adapt the tools 19 Access to Finance for Smallholder Farmers. IFC. 2014. - 65 - Agricultural Lending: A How - To Guide Phase 4 Featured PracCcal Example: Pilo^ng challenges at an East Asian FI. East Asia Bank Faces Challenges when PiloCng Agricultural Lending IFC worked with a bank in East Asia that was rolling out an agricultural lending pilot. The bank piloted the product over the course of one year, using three agricultural lending oCcers. These oCcers were able to disburse a total of 67 loans represen^ng about $450,000. The bank experienced a wide variability in disbursements of loans each month, but learned a lot about their target clients through the process. For the next year of the pilot process, the bank plans that each loan oCcer will disburse an average of three to four loans per month totaling about $11,000. A-er the ini^al 24 months, the ideal loan oCcer will manage a por1olio of about 100 outstanding loans worth $300,000. During the last year of the pilot, this total should climb to 160 loans worth $480,000. The bank plans to achieve a nonTperforming loan rate of less than 3 percent a-er two years and less than 4 percent a-er the third year. There will be two specialized agricultural loan oCcers per branch for the rollout phase. Overall, the bank has found that the pilot implementa^on process was slower than originally planned, preven^ng the team from mee^ng original targets. The pilot team encountered the following key challenges: • Limited analy^cal skills of loans oCcers, which slowed their learning process and produc^vity • InsuCcient and unstructured marke^ng ac^vi^es • Lack of monitoring and followTup a-er marke^ng mee^ngs with farmer associa^ons • Ini^al low quality and accuracy of data collected, which required mul^ple visits to the clients to clean and clarify the data • Inadequate availability of vehicles to visit farmers and clients in rural areas slowed down marke^ng ac^vi^es. As a result of these challenges, the bank decided to standardize and document the processes for preTselec^on of clients to reduce loan processing ^mes. It also updated its recommended proUle for hiring agricultural loans oCcers, ensuring that they do have agricultural backgrounds and stronger analy^cal skills. The bank is implemen^ng a structured marke^ng plan that will be used during the rollout phase. - 66 - P,+D CT D66L+P6)T PHA6 4 – PIL+T T6TI)G A)D +)IT+,I)G CHECKLIST • Were the results of the pilot monitored on a regular basis throughout its dura^on? The primary goals during this phase were to Were these results combined with an Unalize the processes for loan oCcers and evalua^on when the pilot was complete? credit commi2ee members, and to launch the product in a select region. During this phase, • Has a decision been made about your need the project team should also have collected to conduct another pilot? If your team data on the performance of the pilot and decided that you needed another pilot, has tracked it against preTdetermined targets. it been completed? If the pilot did not perform as well as expected, • Have the key lessons from the pilot been the project team should return to Phase 3 of documented and implica^ons for impleT the process and redesign the necessary menta^on been iden^Ued, especially elements and then launch the pilot again. The recognizing how the lessons might apply at following checklist will help you determine if diLerent branches and with diLerent client you are ready to con^nue to the Unal phase of groups? the new product development process. • Was your project manager, senior manageT • Did the pilot run according to plan and was ment, and the board sa^sUed that the pilot it completed within the set deadlines? met the required targets? • Did you successfully resolve all issues and • Is the pilot team prepared to transfer its problems arising from the pilot? knowledge to other staL not involved in the ini^al pilots ? - 67 - Product Development Phase 5 – Product Launch and Rollout P,+D CT D66L+P6)T PHA6 5 – P,+D CT LA )CH A)D ,+LL+ T Product Development Phase 5 – Product Launch and ,ollout -er comple^ng the pilot program, and new product. Each agricultural lending oCcer A if the results show promise for future will interact with clients on a regular basis. The growth of the agricultural lending oCcer must listen to customer suggs^ons on por1olio, the project team is ready to develop product improvement or new products. This a strategy to roll out the product across the will allow the FI to evaluate product updates ins^tu^on. The release of the product should and the program as a whole, as client needs be gradual and will require having necessary evolve over ^me. Some of these interac^ons human and Unancial resources already in place. may lead the FI to return to the market This phase also requires constant monitoring research phase (Phase 2) to learn more about or market feedback throughout the life of the the opportuni^es that have opened up. Figure 13 – Phase 5 – Product Launch and Rollout Phase 3 Pilot Design Phase 5 Phase 1 Phase 2 Product Launch and PreparaƟon Market Research Rollout Phase 4 Pilot TesƟng and Monitoring Market Feedback STRATEGY DEVELOPMENT FOR years. This vision should re.ect the vision for THE ROLLOUT PHASE the en^re FI and for the agricultural lending Once the pilot is completed and product business. The strategy should put in place a adjustments, if needed, are implemented, the roadmap for how the FI will achieve its goals. team should spend ^me building a comprehenT It should set short term (less than one year), sive agricultural lending strategy for the rollout. medium term (one to three years), and long A wellTdeveloped strategy will help manageT term (three to 've years) objec^ves. This ment guide and track organiza^onal goals and implementa^on plan should contain ac^onable objec^ves. With the informa^on gathered up steps, with a detailed schedule. Key elements to this point, the project team should work include target crops and client types, the chanT with management to envision where the nels for reaching clients, human resource and organiza^on is headed in the next three to Uve training needs, new products, appraisals, monitoring, and risk management systems. - 69 - Agricultural Lending: A How - To Guide An organiza^on’s strategy for the rollout should achieve the needed level of organiza^onal be discussed, debated, and decided at the development? board level to truly become part of organizaT ^onal makeTup. Subjects to be covered during • Establishing opera^onal pla1orm requireT these conversa^ons should center on issues of ments. Does the bank’s branch network strategic importance, including: reach suCciently into those areas of market opportunity? Which branches • Understanding the broader market and should be priori^zed based on the market whether there is the scale and opportunity research results? What would be the to reach proUtability. appropriate branch rollout strategy? • Understanding the FI’s compe^^ve • Determining what addi^onal investments advantages in the marketplace and are required to reach the new market. ensuring that the new product line strategy Investments involve hiring or training of builds on these advantages. exis^ng staL, investment market surveys, marke^ng and sales campaigns. It should • Ensuring that objec^ves and goals are include bank infrastructure and new realis^c. Management should be detached technologies, such as handTheld devices and cri^cal when seng objec^ves, that could assist in reaching more remote and set worst, expected, and best case borrowers. scenarios during Unancial modeling. As men^oned in the introduc^on, agricultural • Understanding how the agricultural lending can vary from direct lending to farmers lending product line will aLect other areas to more structured value chain Unance models. of business. Will it support these other The example below illustrates the crea^vity areas or cannibalize them? that can go into strategy development; FIs worked with rice mills in the Mekong Delta • Establishing whether the organiza^on has region of Vietnam to indirectly Unance rice personnel capable of delivering on this farmers. business plan. If not, what is the plan to CollaboraCon between Banks, Rice Mills, and Rice Farmers in the Mekong Delta Region Rice processors, in the Mekong Delta region of Vietnam, are engaged with farmers to diLering degrees. Some processors have built shortTterm rela^onships based on price opportuni^es, while others provide more integral support to farmers by supplying cer^Ued seeds and fer^lizers, and then purchasing all the produc^on via contract farming. FIs have mul^ple advantages when working with such players. This guide encourages FIs to iden^fy and select value chain players for costTeLec^ve collabora^on. In the Mekong Delta the team interviewed two large processors who trade more than 200,000 tons of rice per year. These are local companies, using diLerent strategies to collaborate with farmers. The Urst one uses contract farming and preTUnances seeds and fer^lizer to farmers specializing in Jasmine rice for export, while the second company produces tradi^onal rice for the domes^c market (see table 13). - 70 - P,+D CT D66L+P6)T PHA6 5 – P,+D CT LA )CH A)D ,+LL+ T Table 13 – Financing Models in the Mekong Delta Financing Models Large Co. #1 Large Co. #2 Does the company preTUnance farmers? Yes Yes Number of farmers preTUnanced 6,000 500 Por1olio outstanding $36 million $250,000 Loan term 4 months 4 months Quality of produc^on, Criteria to Unance Quality of produc^on loca^on, group associa^on Interest in CollaboraCng with FIs Yes Yes Amount of preTUnancing $5 million $230,000 to 460,000 Number of addi^onal farmers 1,000 500 Loan term 4 months 4 months The two large rice processing plants Unance a signiUcant number of farmers T 6,000 and 500 respec^vely T with an outstanding por1olio of approximately $36 million and $250,000. Both companies are interested in collabora^ng with FIs to provide addi^onal Unancing to farmers. The Urst company could Unance 1,000 addi^onal farmers with a bank’s support, while the second company could add 500 addi^onal farmers. Given the diLerent strategies these companies employ to interact with local farmers, they approach addi^onal Unancing opportuni^es in diLerent ways. The Urst company is interested in preselec^ng farmers. It will help the bank organize the groups to market the products, provide technical supervision to farmers, and later, support the bank with reten^on and collec^on of loans. The other rice processor is more interested in geng a loan from the bank to onTlend those funds to the farmers, assuming 100 percent of the risks. In fact, this company does not want the bank to lend directly to its farmers. With these two strategies in mind, local FIs could approach each company and structure appropriate models to suit their needs. These two rice producers are examples of the types of Urms FIs should seek out when building agricultural lending por1olios. FIs new to agricultural lending can adapt and adjust their strategies to accommodate this type of partnership. - 71 - Agricultural Lending: A How - To Guide Some of the key ques^ons that the project overlapping management processes un^l team should keep in mind as it Unalizes a returns and volume necessitate the eleva^on rollout plan for agricultural lending across the of the unit. Senior management should decide ins^tu^on: the thresholds for separa^ng out the agriculT tural lending unit that must be met before the • What organiza^onal structure does the rollout phase begins. ins^tu^on want to put in place (for example, centralized unit, small units at Once the decision is made to create a each branch)? Which structure is more standalone agricultural lending unit, this team costTeLec^ve? can help standardize implementa^on and processes across the ins^tu^on, develop • Which region and branch does the ins^tuT ins^tu^onal rela^onships with other value ^on expand to next? What are the criteria chain players in the regions to expand outreach for making this selec^on (for example, level to farmers, and help manage and mi^gate of demand, ability to assign a regional risks. This unit could also coordinate market coordinator)? research in new regions and collect data on crop prices and trends by leveraging its experiT • What human and Unancial resources are ences from the pilot and rollout. Types of needed to introduce agricultural lending in structures can vary by ins^tu^on. However, addi^onal regions? the opera^onal structure must be clearly • What will the marke^ng strategy be? Do all deUned within the FI to enable it to support lending oCcers have a clear message and sales, lending, and monitoring staL with do they know how to eLec^vely present agricultureTspeciUc knowledge. To accomplish the product to new clients? this successfully requires support from the board and senior management team and credit staL (as covered in Phase 1). The Urst step is SETTING UP AN AGRICULTURAL geng each group to understand what is LENDING UNIT involved in agricultural Unance, how it aLects At this point in the new product development the FI, and how to take ownership of the cycle, the project team should evaluate process. whether it is necessary to set up a separate agricultural lending unit. Incorpora^ng the The way in which agricultural lending is agricultural lending unit into the overall integrated completely into an FI’s structure organiza^onal structure will ensure that the depends on a number of factors. These include chain of command is in place for decisionT the FI’s current organiza^onal structure, making, distribu^on of authority is understood par^cularly its credit opera^ons, experience in by all working in the agriculture business line, agricultural lending, the volume of agricultural and func^onal du^es are assigned and lending in its por1olio, and its strategy for covered. capacity building, training, recrui^ng, and retaining quality staL. At the beginning of the rollout phase, it may make sense to keep agricultural lending housed On the other hand, if agricultural lending is a with other lending units. By doing this, the new or rela^vely new concept for an FI, it may por1olio will have a chance to grow and not be necessary for an FI to create a separate mature before the unit is separated as a agricultural lending unit. Instead, the FI could standalone en^ty. The growth of the por1olio invest in increasing staL capacity in the Ueld, will take ^me. So, in the early stages of the regional oCces, and headquarters. Adequate rollout, the FI could take advantage of regional technical and opera^onal support as - 72 - P,+D CT D66L+P6)T PHA6 5 – P,+D CT LA )CH A)D ,+LL+ T a link between headquarters and branch DEVELOPING AN oCces is of cri^cal importance but is o-en IMPLEMENTATION PLAN overlooked. While there should be agricultural Expanding Unancial services into new rural lending champions within an FI, there are pros areas requires an integrated approach to and cons to crea^ng an agricultural lending manage and mi^gate the risks of agricultural unit. It may be a good Ut for very experienced lending. FIs must implement the diLerent tools FIs with large volumes of agricultural lending, and strategies discussed above, including: but may not work for smaller FIs. selec^ng regions with high agricultural poten^al, targe^ng lowTrisk farmers, developT Any organiza^onal chart revisions should also ing robust and adequate loan appraisal be accompanied by a review of the opera^onal technologies, designing adequate loan pla1orm for delivering agricultural loans. products for farmers, selec^ng staL with Investments may need to be made in adequate backgrounds, and developing addi^onal technologies, such as handTheld strategic partnerships with local value chain devices, informa^on technology (IT), and players to manage risks. Calibra^ng and management informa^on systems (MIS), to balancing all these principles will help ensure enhance electronic lending pla1orms to reach a successful implementa^on and rollout of new more distant popula^ons. Increasingly, FIs agricultural lending products. around the world are inves^ng in technology that can have a signiUcant impact on their rural Rolling out agricultural lending across the and agricultural lending lines and Unancial ins^tu^on involves making the new product services, including savings. FIs are expanding available to a much bigger market, and thus networks of automated teller machines as well requires careful planning. Assuming that the as mobile banking and “branchless banking” characteris^cs and features of the product are approaches, such as handheld devices and mini in line with the needs of prospec^ve clients, printers, global posi^oning systems (GPS), and the project team will need to develop a mobile phone applica^ons. detailed plan that assigns responsibili^es and deUnes ^me periods for the broader rollout. For example, an FI in the Dominican Republic The strategy should include a number of has started using handheld mobile devices to components, including: capture and analyze seasonal incomes and cash .ows from farmers, eLec^vely automatT Strategy and Budget: First and foremost, the ing the collec^on of data. These handheld team will need to determine the ^ming and devices have reduced data input errors, logis^cs behind rolling out the product to each increased data processing speeds, and have and every branch of the ins^tu^on. Next, and shortened the loan approval process. MTPesa in conjunc^on with senior management, the in Kenya is another interes^ng example of how project team should clarify how agricultural mobile payments have reached more than 50 lending Uts into the broader ins^tu^onal percent of the country’s rural popula^on20. mission. As a part of this, the team will also The collabora^on between Safaricom and local need to set a clear budget for expansion of banks has enabled bank clients to transfer processes across the ins^tu^on. This will money and purchase goods using their mobile include an ongoing marke^ng plan that covers phones, drama^cally reducing transac^onal all branches and includes proUtability planning costs, par^cularly in rural areas. to Unalize the numbers of agricultural loans 20 56 percent of rural Kenyans are “registered ac6ve mobile money users.” Financial Inclusion Insights. Kenya Country Pro'le. 2015. - 73 - Agricultural Lending: A How - To Guide and size of the por1olio that will be required region, and input and technology suppliers. for agricultural lending to be proUtable. Using Branch managers and product managers the data from the pilot rollout, the team should should monitor progress of the marke^ng also Unalize shortTterm strategic ac^ons that plans in each region on a monthly basis. The need to take place to ensure success of rolling messages used should complement those used out agricultural lending. Addi^onally, a for other products and be consistent with the longTterm development strategy that includes overall corporate brand. Each component of hard targets and objec^ves for the agricultural the marke^ng and communica^ons should be por1olio as a whole will need to be laid out in complementary and promote a compelling the implementa^on plan. message about the FI that resonates with the rural popula^on. Growing the Agricultural Lending Porolio: Based on the results of the pilot and the Monitoring Growth: Based on the goals and extensive research conducted during the objec^ves set forward in this strategy, the team market research phase, the team must deterT will need to monitor the growth of the mine how best to grow the por1olio. This could por1olio and establish systems to ensure each occur by a2rac^ng new clients or by crossT milestone is met. Using the tracking tools selling to exis^ng clients. No ma2er which described in the previous sec^on and in strategy the team uses, clear targets must be appendix I, the project team should track set and progress tracked as the product is por1olio performance as the product is rolled rolled out. Addi^onally, the team will need to out. Beyond these basic measures, the project design a training curriculum for the rest of the team should track gross por1olio size, costs loan oCcers who will be working with agriculT and proUts. Further, by increasing the number tural clients. This could occur by region or at of loan oCcers working with the agricultural centralized training centers. Ideally, the prodT sector, the team will need to establish criteria uct will be rolled out gradually in the regions and monitoring systems to ensure that necesT with highest agricultural poten^al, so branches sary capacity and levels of technical knowledge located in the primary agricultural regions are maintained across the ins^tu^on. could be targets for the ini^al wave of training. ARREARS MONITORING MarkeCng and PromoCon Strategy: Combining As discussed above, lending to the agricultural the FI’s marke^ng experience and the results sector is risky in part because the agricultural of the pilot, the project team should devise a sector is exposed to risks such as climate strategy to promote the agricultural lending change and market demand. External shocks product, speciUcally to the target audience like typhoons, droughts, and other weather selected as priority earlier in the process. The catastrophes impact the agricultural sector team should speciUcally use the data obtained regularly. Market and price risks could aLect during farmer interviews and focus group farmers in a region or country with devasta^ng discussions from the market research phase. eLects on their incomes and repayment This data will help the team determine which capacity. Even when there are no major message is most compelling to the target external shocks, agricultural produc^on is audience and how best to reach them. The subject to minor varia^ons in yields and strategy for promo^ng agricultural lending harvest dates, which could delay payments of should form part of the FI’s overall branding loan installments. and marke^ng strategy. Each region should develop its own marke^ng plan targe^ng FIs growing their agricultural lending por1olios farmer associa^ons, value chain players in the need to have special strategies to deal with - 74 - P,+D CT D66L+P6)T PHA6 5 – P,+D CT LA )CH A)D ,+LL+ T major shocks as well as with minor natural dras^c external shocks, the level of damage climate varia^ons that could aLect yields or and impact at the farm level varies drama^T harvest seasons. In the la2er case with minor cally. Therefore, FIs should visit each farmer natural climate varia^ons, FIs could prevent and assess the damage suLered individually, if and reduce rela^onship stress and nega^ve possible. In many cases, damaged crops will interac^ons with clients by providing some recover later, but produce subop^mal yields. In extra ^me to farmers for repayments. This these cases, FIs should nego^ate individually could include allowing the extra ^me farmers with farmers, providing extra ^me and even require to harvest, process, and sell their addi^onal funds to those farmers heavily products. Any addi^onal ^me given to pay loan impacted, if they show strong willingness to installments should be discussed with farmers pay back the loan. Some farmers will be during the loan assessment and included in the impacted only moderately, and will be able to loan design. pay back the loans with only minor delays or rescheduling. The only way for FIs to assess the Some^mes, even a-er giving extra ^me to pay real impact and to iden^fy those diLerences is loan installments, farmers might face delays in to visit farmers one by one and nego^ate with the harvest and marke^ng of crops. Banks them individually. FIs should show real interest should have systems in place that closely in understanding each par^cular situa^on monitor farmer payment schedules. Whenever and be open to providing adequate support there are delays in the payments, loan oCcers accordingly. should visit farmers immediately, iden^fy the problem, and determine if the late payment is In any event, addi^onal provisions must be due to external factors and whether the made every year to manage those cyclical willingness to repay is strong. If this is the case, external shocks. FIs should have a longTterm the bank could be .exible and provide vision for the agricultural sector, which will in addi^onal ^me. Those rescheduled loans turn have a posi^ve impact on farmers, and should be for short periods of ^mes, and further build goodwill and loyalty among the should have a detailed report and the approval community. of a supervisor or branch manager. A-er the extra period, farmers should be able to repay SUMMARY CASE STUDY the loan. If there are addi^onal problems, The case study below illustrates one ins^tuT those cases should be analyzed and processed ^on’s methods for rolling out agricultural loans by special loan recovery teams, and the to a sector of the popula^on it was already responsible loan oCcers should provide close serving. This example brie.y shows how the support. ins^tu^on progressed through the product development process and how it adapted its In case of major disrup^ons due to external current processes and opera^ons to be2er shocks such as typhoons, droughts, or other meet the needs of its customers. This FI used weather events that could impact larger innova^ve channels to signiUcantly increase its regions and large numbers of farmers, FIs business and customer base. It trained staL in should put together a special team to assess a specialized unit a2ached to its lending the damage at the farm level. FIs should work department and tweaked products that in coordina^on with government agencies to already existed in its por1olio. assess the damage in the region. Even with - 75 - Agricultural Lending: A How - To Guide Phase 5 Featured PracCcal Example: Introduc^on of agricultural lending at a Cambodian FI. Cambodian Financial InsCtuCon Develops Agricultural Lending21 A Unancial ins^tu^on partnered with the World Bank’s Agriculture Finance Support Facility to develop agricultural lending skills, design new loan products to respond to farmers with larger Unancing needs, and enhance service delivery to reach remote rural popula^ons. The FI established an agricultural lending unit at the beginning of the project within its credit department. It was faced with the challenge of Unding quality loan staL that understood agriculture. The FI decided to Ull key posi^ons in the unit with internally recruited personnel specialized in product development and lending, who were subsequently trained in agriculture. The ins^tu^on also decided to use exis^ng lending staL, many of whom had already been lending to agricultural clients, but lacked agricultural exper^se. To address this, the FI appointed two permanent trainers within the unit to train and coach lending staL at the branch level during the product pilot stage on how to lend to agricultural clients. Another eight trainers coached staL during the rollout stage. Also, an agricultural expert was recruited to provide sector exper^se and manage the FI’s rela^onship with agricultural value chain partners. The new unit directed and managed the expansion of agricultural lending, taking responsibility for product design, staL training, and development and implementa^on of agricultural lending guidelines, policies, and procedures. Previously, the FI had Figure 14 – Growth of the FI's Agricultural tradi^onally focused on Lending Por olio 201014 providing microloans to farmers. However, these $150 230,000 microUnance loans had not Ag Loans and Advances $130 220,000 Number of Ag Clients been suCcient to meet the $110 210,000 needs of farmers because of Milions $90 180,000 their small value, in.exible $70 180,000 $50 170,000 repayment schedule, and $30 160,000 rela^vely higher interest $10 150,000 rates. During the project, the 10 012 012 012 012 012 012 012 012 012 20 2 2 2 2 2 2 2 2 2 e 04 01 02 03 04 01 02 03 04 FI developed a new cash s el in .owTbased loan product that Ba Ag Loans and Advances Ag Clients was designed to meet the growing demand for larger loans among farmers not served by other Unancial ins^tu^ons in Cambodia. With the launch of the new product, the average agricultural loan was approximately $6,000, compared to the average microloan of $1,300. The new loan provides .exible repayment terms in line with farmers’ seasonal cash in.ows. Interest on the new loan product is on average 0.10 percent lower than microloans. The product was piloted gradually in 14 branches in various 21 Cambodia: Project Results and Lessons. World Bank Group. February 2015. - 76 - P,+D CT D66L+P6)T PHA6 5 – P,+D CT LA )CH A)D ,+LL+ T parts of Cambodia and the na^onwide rollout is now taking place. Loans are disbursed by specialized credit oCcers trained on the new cash .owTbased lending methodology. As of October 2014, the new loans amounted to $11.6 million (equivalent to 4 percent of the FI’s total loan porolio). As in similar markets, Cambodian FIs have a limited presence in rural areas since the low popula^on density does not jus^fy the cost of running a branch network. Hence, the FI needed to Und a costTeLec^ve means of reaching rural clients. To achieve this, the FI took advantage of Cambodia’s high mobile phone penetra^on to launch a pilot mobile banking service with mobile tellers—the FI’s Ueld oCce employees who visit rural clients to facilitate Unancial transac^ons. Currently, such transac^ons are limited to deposits, withdrawals, new savings accounts, and account balance conUrma^on. However, the bank plans to include other services, including loan applica^ons. The transac^ons are completed using 3GT equipped smartphones. Clients receive an SMS conUrming comple^on of the transac^on. CHALLENGES AND LESSONS agent distribu^on network and mobile tellers LEARNED as costTeLec^ve means to expand and scale up Developing new products and services that services to agricultural clients. be2er meet client needs results in increased Best PracCces and Success Factors for New business, but also requires addi^onal capacity Entrants to manage growth eLec^vely. In the case study presented above, the FI started to serve a new IFC conducted a recent study on Unancial market of farmers with larger Unancing needs. ins^tu^ons introducing agricultural lending in Given the high demand for its new product La^n America. The lessons that resulted from during the pilot phase, the FI implemented this study can be valuable when planning the appropriate measures to ensure its staL was roll out. As discussed before, introducing able to take on new clients eLec^vely. agricultural lending in a Unancial ins^tu^on Measures included con^nuous staL training in requires careful planning and prepara^on, as agricultural lending methodologies and operaT well as adapta^on of systems and resources. It ^onal improvements to eLec^vely manage goes beyond just introducing a new product. It increased cash volumes. To enable more rigorT also requires highTlevel management commitT ous and appropriate credit risk assessment of ment, seng realis^c targets, and being ready larger agricultural loans, the FI developed a to adjust terms and prac^ces. The factors listed detailed risk assessment methodology and below are required to successfully introduce trained its lending staL on how to use this agricultural lending: when appraising loan applica^ons. Also, • Knowledge of the Client: While important coaching provided to the lending staL for any lending opera^on, it is par^cularly enhanced the staL ’s ability to serve larger cri^cal when entering the agricultural clients with more complex requirements by lending market. building up their rela^onship management skills. The FI also tested the use of both an - 77 - Agricultural Lending: A How - To Guide • Flexible Products: Agricultural lending is • CustomizaCon of MarkeCng Materials to not one size Uts all. Loan tenor, disburseT Reect the Target Market: Incorpora^ng ment, and payment terms need to be images of the target clientele can help adaptable to the diverse farmer proUles. overcome the mistrust that farmers o-en have of Unancial ins^tu^ons and their • Cash(Flow Analysis of the Household presump^on that FIs are not interested in ProducCon Unit: Analyzing the household serving them. produc^on unit allows to match payment terms to cash .ows. It also provides a more • High(Level Buy(In: Successful lending to accurate analysis of payment capaci^es the agricultural sector requires products, and true risks of lending to farmers. approaches, and systems that are dis^nct from those for microcredit. It requires • Diversi ed Risk Management TacCcs: diLerent mindsets and investments in new Agricultural lending risks are diverse and tools and systems. In short, it requires a need to be mi^gated in a variety of ways. strong ins^tu^onal commitment and Close, UeldTbased client monitoring, support by senior level management. por1olio diversiUca^on, conserva^ve cash .ow analysis, and credit bureaus and • A Strong Customer Service OrientaCon: credit scoring are all tools an FI can use in FIs must provide rapid loan processing and risk management. Also, the FI’s collateral disbursement, personal a2en^on to requirements should be commensurate clients, customized products, terms and with loan sizes and other risk factors, such services that match client needs, and as client repayment history, crop diversiUT nonTUnancial services to compete ca^on, and nonTagricultural sources of eLec^vely with subsidized credit from revenue. agricultural development banks and diLeren^ate oLerings among themselves. • Specialized Loan O%cers: Hiring loan oCcers with a background in agriculture is • Explore OpportuniCes to Introduce or considered cri^cal. Introducing addi^onal, Expand Value Chain Finance: Value chain specialized staL posi^ons to support Unance could be used to serve the por1olio quality may also be necessary. “missing middle” farmers – commercial farmers in exis^ng value chains – and reach • Design IncenCve Systems to Promote larger groups of farmers more eCciently. Agricultural Lending: Establishing dis^nct targets for agricultural and commercial • Explore Lower Cost Delivery Channels: por1olios, and/or adjus^ng the agricultural Agent and ATM networks, mobile phone targets to seasonal varia^ons, may help banking, and debit cards can all be used to incen^vize agricultural lending. reduce costs of lending to rural and agricultural clients, while making it easier • AutomaCon of Data Capture and Credit for clients to access Unancial services. Analysis: Prudent agricultural lending requires collec^on and analysis of a signiUT • Consider Introducing or Expanding cant amount of client, produc^on, and Availability of Longer ( Term Financing for price data. Automa^on can reduce errors, Asset AcquisiCon: To meet farmers’ increase eCciency, support faster por1olio investment needs, FIs may wish to adjust growth, and improve loan applica^on their maximum loan terms and lending assessment. methodologies, and use of value chain Unance and other mechanisms to reduce the risks of longTterm Unance. - 78 - P,+D CT D66L+P6)T PHA6 5 – P,+D CT LA )CH A)D ,+LL+ T • Evaluate OpportuniCes for Cross(Selling: • Have you created a promo^ons and A focus on the broader Unancial needs of marke^ng strategy? agricultural clients could help reduce client vulnerability and contribute to the • Have you agreed and documented where economic advancement of lowTincome agricultural lending will be rolled out and clients, while improving proUtability at the in what order? individual client level. • Has staL been trained to carry out the rollout and have new loan oCcers been CHECKLIST trained? Before you begin the Unal rollout of agricultural lending, make sure you have accomplished the • Have standardized processes been drawn following: up for all branches adop^ng agricultural lending? • Have you created a detailed expansion strategy and rollout plan, including a • Have you established a means to monitor detailed ^meline, assigned responsibili^es, and evaluate your rollout? and budget? - 79 - Conclusion C+)CL I+) Conclusion ntroducing agricultural lending can be farmer’s risks, and suggests loan decisions I a complicated process. But if the according to an objec^ve standard. ins^tu^on puts in the ^me necessary to adjust processes, research target markets, train • You should seek external help for phases staL, and monitor the pilot and ins^tu^onal where your ins^tu^on lacks the required rollout, both the FI and the clients can beneUt capabili^es. greatly from the results. In summary, here are • Your agricultural lending team and your some key points to remember as you introduce senior management must plan carefully for agricultural lending at your ins^tu^on: the introduc^on of agricultural lending. • Before you begin the new product • You should introduce agricultural lending development process, you should inves^T gradually and build strategic alliances with gate several important overarching other players in rural areas (agribusinesses, aspects: the macroTeconomic and regulaT technology transfer ins6tu6ons, insurance tory environments, ins^tu^onal Unancial companies, and government agencies) to stability, senior management buyTin, and manage and mi^gate agricultural risks. client demand for the product. • You should conduct at least one successful • You must understand your target client to pilot before you roll out agricultural design products that eLec^vely meet their lending across your whole ins^tu^on. needs. • You should monitor and evaluate agriculT • You must create a sound project team to tural lending on an ongoing basis and deal introduce agricultural lending. with problems as they arise. • You should design and implement a strong Following these guidelines should help you lending methodology that captures introduce agricultural lending successfully, seasonal cash .ows, ensures that data generate proUt for your ins^tu^on, mo^vate collected is consistent with regional your staL, and sa^sfy your clients. benchmarks, helps the FI understand the - 81 - Agricultural Lending: A How - To Guide Appendix A – Additional ,isks The table below discusses some addi^onal risks and examples of challenges that FIs could examine when exploring investments in the agricultural sector. Table 14 – Agricultural Risks and Mi5ga5on Strategies Risk MiCgaCon Inventory Risk: Inventory risks include both To mi^gate this risk, FIs could require that producT overproduc^on and underproduc^on. If a farmer ers formalize their sales rela^onships in contracts overproduces during a certain harvest period T and use those as collateral for Unancing. Another perhaps in response to rising prices or as a result approach could be to use a system similar to that of specula^on that the product will be in greater described above for mi^ga^ng climate and natural demand T he or she must have space to store the resource risks T FIs could require producers to buy product for sale at a future date or Und other a package of services that includes insurance and markets to sell the product. UnderTproducing as a technical assistance. These services could help result of poor planning or poor growing condi^ons cover any losses; should a producer be unable to could nega^vely impact sustainability of business repay the loan. rela^onships and every aspect of the farmer’s life, including his or her ability to repay a loan. Cash Risk: Perhaps the most basic risk, which this Focusing on mi^ga^ng cash risks can be a very guide will explain in more detail later, is the lack of important area for FIs entering the agricultural liquidity most farmers face during the growing Unance space. Handling these risks can be largely season. Most agricultural products do not produce managed by the FIs themselves. This repayment stable cash .ows like other commercial enterprises risk can be lessened by inves^ng in the developing or services, so farmers are some^mes unable to or adap^ng new Unancial products to the unique meet monthly loan repayment requirements that needs of the agricultural sector. For instance, tying are typically demanded by FIs. As a result, farmers repayment to cash .ow pa2erns for example, are unable to take advantage of tradi^onal repayment at harvest ^mes can make accessing Unancial products, even if there is an FI physically Unance much easier for rural clients and can present in the community. considerably reduce credit risks for the FI. Regulatory Risk: Given the pressure on governT When it comes to government regula^ons, FIs can ments to ensure adequate agricultural produc^on do li2le if the government enacts policies that and food security, the regulatory environment adversely aLect investments in agriculture. One of could pose challenges to FIs evalua^ng the best ways to overcome this challenge is to seek investments in the sector. Agricultural value chains out a diverse range of investments in diLerent frequently face risks from government regula^ons crops and products at all levels of the value chain. and programs. For instance, unfavorable governT As is the case with any por1olio of investments, as ment subsidies could distort market dynamics and long as the risk is spread out over a number of disincen^vize private sector investment. Or diLerent value chains, the impacts of regula^on excessive taxes and customs formali^es could changes will be minimized. make expor^ng too cumbersome. - 82 - APP6)DI Appendix  – Hybrid and tructured inancing odels23 PRODUCER ORGANIZATION administer and manage individual loans to FINANCING farmer members through the organiza^on. The following are key criteria to determine whether The small size and dispersed loca^on of small a producer organiza^on or coopera^ve will farmers that dominate the produc^on base of make a strong partner for an FI. certain commodi^es make it diCcult and costly for banks to lend directly to small farmers. • Strong, established market links and the Many ^mes, producer organiza^ons are capacity to sustain them. established to aggregate the needs of farmer members and enable eCcient supply of a range • Track record of assuring needed quality of func^ons that may include input supply, and produc^on levels. advice on good farm prac^ces, transport, marke^ng and sales, postTharvest processing, • Demonstrated ability to add value through and access to Unance. When strong, wellT input supply, technical services, postT managed producer coopera^ves or associaT harvest packaging, transport, and/ or ^ons exist, banks can lend to or through these Unancing links. producer groups, or the organiza^ons can help • Management capabili^es to con^nue to aggregate the credit requirements of farmer put together and expand opera^ons. members. • Solid legal structure enabling the aggregaT There are two varia^ons on this model: the Urst tor to support loans. (Model 1) is also known as a wholesale model, based on a bank lending indirectly to smallT • Solid Unance and accoun^ng systems and holders through the aggregator organiza^on. results to make the aggregator a reliable In this case, the en^re group is the borrower, partner and if required, conduit for and therefore group members guarantee each lending. other. The second (Model 2) is also known as the agent model, in which the group’s organiT • Work with a substan^al number of small za^on may administer the loans or a por^on of farmers, normally at least a hundred and the loans, but individual group members are o-en thousands, to jus^fy FI’s inten^on to also directly obligated as borrowers. establish costTeLec^ve partnerships. The beneUts of both approaches are savings on Weaker producer organiza^ons may not be costs of creditworthiness assessment and loan appropriate for Model 1 but could be used in administra^on. Success factors include Model 2 to help iden^fy progressive farmer strength of management, length of history, and borrowers. They can be strengthened to commercial orienta^on of the coopera^ve provide some complementary services, but through which the bank will lend. may not be viable as conduits for Unancing or other services. Addi^onally, the security of the However, many such producer organiza^ons model can be enhanced by cash collateral are poorly managed. It is important to assess the management skills, Unancial capacity, and historical performance of such organiza^ons 23 This sec6on borrows heavily from IFC’s “Guide for both to eLec^vely u^lize the Unance and to Financing Agriculture Value Chains.” P. Varangis, H.A. Miller, D. Chalila, H. Dellien and D. Shepherd. - 83 - Agricultural Lending: A How - To Guide requirements at the organiza^on level to then move into the territory of more provide some form of group guarantee, instead structured value chain Unance due to the high of relying on tradi^onal collateral or claims on degree of collabora^on necessary. harvest proceeds at the individual farmer level. Banks should look for the following quali^es Producer organiza^ons can Ull many diLerent when iden^fying poten^al input supply responsibili^es, and whether to use Model 1 or company partners: Model 2 depends on the structure and role of the organiza^on. • A strong track record of providing a range of value added inputs to small and mediumTsized farmers, normally combinT INPUT SUPPLIER FINANCING ing seeds, fer^lizer, and plant protec^on Most commercial banks have limited branch products. networks outside major urban centers and few branches in rural areas. Banks can pursue • Strong rela^onships of trust and respect agricultural Unance via branchless banking with local farmers, based on solid value arrangements with small retailers and other add and integrity of the dealer and, if companies (including telecoms) that have rural relevant, the brand of the network. distribu^on networks. Input supply companies and other agroTdealer networks (such as those • Strong knowledge of technical aspects of for equipment or irriga6on) are par^cularly farming in key commodity groups, ideally suitable for agricultural Unance, as these graduates with agronomy training to help companies o-en have strong knowledge of the screen agroTloans and par^cipate in good farmers in the community. They have the disbursements and collec^ons. capacity to screen borrowers and serve as • ProUtable opera^ons in which agricultural conduits for bank loans, par^cularly in the Unance can contribute incrementally to the Unancing of inputs or equipment. proUtability of the dealer through fees and In this model, banks may also lend directly to increased input sales. local agricultural input dealers but leave the • Ideally, value proposi^on that includes providingsion of credit to individual farmers technical and informa^on services to completely in the hands of the agroTdealers farmers, enabling the farmer to receive themselves (using agro(dealers as in the inputs, technical support and Unance from wholesale model described previously). the dealer. Some agroTdealers are part of a network • Adequate inThouse capacity to handle the established by input supply companies, screening of agroTloans in the season prior associa^ons, or other ini^a^ves providing to plan^ng/growing, when most agriculT technical assistance, which are playing tural loans need to be made. proac^ve roles in combining Unance with other services. In these cases, the bank can tap into • Loca^on in an area where the Unancial the combina^on of inputs and advice to ins^tu^on intends to concentrate agriculT provide Unance to enable farmers to increase tural Unance opera^ons. produc^vity and earnings. In most cases, these agroTdealer arrangements STRUCTURED VALUE CHAIN do not involve buyTback arrangements with FINANCING farmers and thus do not address access to Structured value chain Unance (VCF) models markets. When an input supplier links with a require the most collabora^on with corporate buyer and a Unancial ins^tu^on, such models agribusinesses, as banks rely on some form of - 84 - APP6)DI buyer contracts (wri en or verbal) to help CorporateTfarmer rela^onships, crop characT secure its loans in these models. From the teris^cs, and involvement of other intermediT bank’s perspec^ve, having a strong buyer in the aries in the value chain must be analyzed chain in itself provides comfort.This helps to before developing a speciUc structured value reduce or manage the risks of limited market chain approach. The following guidance can access and price vola^lity, and thus reduce help determine whether a value chain falls into default risks, especially if the farmer has an loose or ^ght VCF structures. oLTtake agreement with a trusted counterT party. CorporateTfarmer rela^onships in ^ght value chain Unance are most successful: Structured VCF models can be divided into ^ght and loose VCF models, with “6ghtness” • When the agribusiness has built longT determined by the magnitude of sideTselling standing rela^onships with a large number risks. The risk of sideTselling is the biggest of small farmers due to a natural monopT challenge for any actor that provides inputs, oly. For example, in sugar cane, the weight input Unance, or working capital to farmers in and perishability of the commodity means a value chain with expecta^ons to generate that sugar cane producers are dependent repayment via sale proceeds from these farmers. on the sugar mill in the area. Loose value chains are typical of crops that are • When the diLeren^ated characteris^cs of more easily marketable and, therefore, a2ract the crop being procured by the agribusiT thirdTparty buyers seeking to purchase crops ness means that the company pays higher directly from farmers in the value chain. While prices than others in the market. For farmers may have contracts with value chain example, a dried onion exporter seeks hard buyers, they can be tempted to “side(sell” to white onions that get a higher price than these third party buyers. Therefore, buyers are other onions in the market. reluctant to provide any form of guarantee or • When the agribusiness has developed support to the bank for loose VCF models. stable, mutually advantageous procureT Tight value chains are integrated chains in ment and technical service arrangements which farmers face only one de facto buyer for with a substan^al number of small farmers. certain types of crops, such as highly specialized Crop characteris^cs ma2er, as high value export crops, highly perishable crops, and added commodi^es are most promising for crops with constric^on points in the chain, ^ght VCF rela^onships: usually transport costs or specialized processT ing (such as sugar or co on). In these ^ght VCs, • In products such as fruits and vegetables, sideTselling is very costly or even impossible. As dairy, coLee, and co2on, the agribusiness a result, buyers are o-en willing to engage can jus^fy the needed expenditures to more robustly with the bank in ac^vi^es to provide or organize input supply, technical facilitate VCF and may even provide a guaranT services, quality control, and procurement tee or other forms of riskTsharing. with a substan^al number of small farmers. As may be expected, there is also a spectrum between strictly loose and extremely ^ght • If the company has the market channels to value chains. Because of the diLerences assure farmers diLeren^al prices for between loose and ^ght, as well as the range quality or diLeren^ated products, these between the two ends of this spectrum, rela^onships tend to be stable and provide approaches needs to be customized according a strong pla1orm for value chain Unancing. to the situa^on. - 85 - Agricultural Lending: A How - To Guide • Perishable products—fruits, vegetables, • When an agribusiness enters such situaT dairyTTwhich require cold storage or rapid ^ons, it must be able to oLer superior arrival to Unal markets to retain value, oLer value through higher prices for quality strong prospects for ^ght value chain outputs, advice on good prac^ce, access to Unancing. inputs, and access to lowerTcost Unancing. Intermediary and aggregator involvement in These structured models represent the highest the value chain can aLect the degree of ^ghtT degree of collabora^on and coordina^on and ness: require considerable ^me to structure and implement. The actual details of the roles and • The involvement of tradi^onal traders and responsibili^es of each party must be carefully middleman can undermine the establishT agreed to and implemented. However, in ment of ^ght value chains between addi^on to the high cost of coordina^on, the agribusinesses and small farmers. poten^al outreach here is limited to only those farmers that are connected to the buyers (and • These traders o-en charge high eLec^ve input suppliers). rates for advances, take high margins, and do not help farmers improve produc^vity In some cases, such structures are the only and earnings. feasible way to reach a large number of farmers. Structures, in which distribu^on and • At the same ^me, many small farmers have repayment are managed by the agribusiness genera^ons of dependence on these buyer and/or input supplier, demand tradi^onal traders, who o-en are embedT maximum transparency to ensure that farmers ded in the community, willing to provide understand the Unancial products that they are advances and emergency loans, and receiving (in terms of loan amount, interest provide stable procurement arrangements. rate, and other terms). - 86 - APP6)DI Appendix C – inancial and Governmental Policies Affecting Agricultural Lending The table below lists some key Unancial policy areas FIs should evaluate when considering launchT ing a new product for the agricultural sector. Table 15 – Financial Policies and Their Impacts on FIs Policies that Enhance Agricultural Policies that Undermine Financial Policy Finance Agricultural Finance Interest Rates Freedom for FIs to set reasonable Interest rate ceilings set at levels that interest rates. They need to charge do not enable proUtable agricultural interest rates that allow them to cover loans to farmers. their costs and enable proUt. Subsidies Temporary subsidies to FIs to cover a Interest rate subsidies that are por^on of ini^al costs of establishing cumbersome, carry an expecta^on of strong agricultural Unance opera^ons, low repayments, and undermine the with par^cipa^ng FIs free to charge building up of rigorous, commercial rates that would be viable without agricultural Unance. Temporary external subsidies. interest rate subsidies o-en lead to elimina^on of lending once subsidies end. Guarantees Guarantees used as inducement for Guarantees to cover more than 50 Unancial ins^tu^ons to develop percent of Urst loan losses. This policy agricultural Unance. FIs take the does not incen^vize FIs to conduct majority of risk or Urst loan losses to rigorous due diligence at the outset, It provide incen^ves to build a rigorous o-en creates lax, poor performing agricultural Unance opera^on and agricultural Unance por1olios. develop other riskTmi^ga^ng policies/instruments. Quotas Required lending to farmers with no Lending requirements with interest interest rate ceilings or a reasonable rate ceilings. These ceilings o-en ceiling. This can induce FIs to create induce FIs to avoid or Und other systems and capabili^es for proUtable means to meet the requirements. agricultural Unance. Collateral Flexibility in acceptable collateral for Strict collateral requirements and Requirements rural/agricultural borrowers that minimum coverage levels imposed by re.ects local land use rights and central banks with signiUcant reliance includes moveable collateral on land with ^tled property commodity inventory, equipment, ownership severely limit loans to contract rights . The applica^on of farmers lacking clear land ^tles. capital adequacy requirements at the por1olio level instead of the individual loan level can help. - 87 - Agricultural Lending: A How - To Guide Policies that Enhance Agricultural Policies that Undermine Financial Policy Finance Agricultural Finance Agricultural Agricultural development banks with Agricultural development banks Development marketToriented policies, appropriate providing subsidized loans. This Banks interest rates, diversiUed por1olios undermines the building up of and a management structure free of services by other commercial poli^cal pressure. Alterna^ve roles in ins^tu^ons. secondT^er Unancial linkages and/or support to all FIs. Social Security Separate Unancial sector and Credit waivers, especially those governmental social sector policies. in.uenced by poli^cal interests. These Policies should separate support to waivers severely weaken the credit rural/agricultural households from culture and strongly discourage FIs poli^cal in.uence. from lending to the agriculture sector. The table below outlines some key governmental policies aLec^ng agricultural lending for which background research should be collected, along with notes to assess the policies from a qualita^ve perspec^ve. Table 16 – Government Policies and Their Impacts on FIs Policies that Enhance Agricultural Policies that Undermine Government Policy Finance Agricultural Finance Infrastructure Government provision and Unancing IneLec^ve government provision or of roads and other infrastructure, if Unancing of infrastructure can hinder done eLec^vely, can facilitate the .ow the development of commercial value of value chains, par^cularly in chains. rela^vely remote areas. Price Controls Governments should support Government controls on commodity transparent market pricing of prices, normally geared to protect the commodi^es with investment into end consumer, o-en undermine availability of price informa^on for key earnings to farmers and crops. Governments should procure agribusinesses. When governments key commodi^es at market prices only enter into direct procurement of when necessary to stockpile for food commodi^es from farmers, with security objec^ves. minimum prices established adminisT tra^vely, they o-en undermine the ability of companies to establish direct rela^onships with small farmers. Insurance Government agricultural insurance Government agricultural insurance can be useful in reducing costs of that is poorly managed and exclusive building weather sta^ons and can undermine the willingness and historical data, provided that any ability of private insurance providers governmentTsupported insurance is: to develop and oLer services. Poorly - 88 - APP6)DI Policies that Enhance Agricultural Policies that Undermine Government Policy Finance Agricultural Finance • Reasonably priced designed government insurance may • Simple to administer by FIs also lead to increased moral hazard. • Quick to honor claims • Solvent • NonTexclusive, database also available to private insurance suppliers. Subsidies Guaranteeing a .oor price for staple Subsidies are expensive to implement crops can ensure that a country has a and keep prices ar^Ucially low, reliable supply of important thereby s^.ing interna^onal agricultural goods. compe^^on. TariLs Taxes on imports or exports can Import and export taxes can ar^Ucially protect domes^c industries and impact prices and decrease cul^vate demand for domes^c goods. interna^onal compe^^on. - 89 - Agricultural Lending: A How - To Guide Appendix D – Institutional Diagnostic24 This ins^tu^onal diagnos^c example will help the project team assess the feasibility of introducing agricultural lending in the FI. It should be used to summarize results of the industry and compe^tor assessment, market demand, and organiza^onal readiness. The project team should Ull in the ins^tu^onal diagnos^c as it goes through the relevant steps in Phases 1 and 2, adding addi^onal informa^on as the project proceeds. This template should be used only as a guide. It is best to include as much informa^on as possible, so the project team may need to include addi^onal sec^ons within this diagnos^c. INSTITUTIONAL READINESS Financial Analysis Year 1 Year 2 Percentage Change ProjecCons Por1olio Quality Repayment Rate as of 30 Days Por1olio at Risk PAR as of 30 Days Arrears Rate WriteTOL Ra^o Risk Coverage Ra^o ECciency Cost Per Borrower Personnel Produc^vity Opera^ng Expense Ra^o Case Load Average Por1olio Per Loan OCcer ProUtability Opera^onal SelfTSuCciency Adjusted Return on Assets Adjusted Return on Equity Yield Financial Management Funding Expense Ra^o Cost of Funds Ra^o and Cost of Debt Debt to Equity Ra^o Equity and Assets 24 Adapted from H Dellien, O. Leland. “Introducing Individual Lending.” Women’s World Banking. 2006. - 90 - APP6)DI OperaConal E ecCveness Percentage Year 1 Year 2 Change Repayment Rate as of 30 Days PAR as of 30 Days Opera^ng Expense Ra^o Opera^ng SelfTSuCciency Loan Loss Reserve Number of Loans Per Loan OCcer Average Por1olio Per Loan OCcer Ra^o of Number of Loans to Total StaL Number of Ac^ve Loans Cost per Loan Average Loan Size Client Reten^on Rate LENDING METHODOLOGIES QuesCons: • Has the process been standardized? Processes Provide a brief descrip^on of the type of • Map out the loan process. How does lending methodologies used by the ins^tu^on, this process compare to other best iden^fying principles and the speciUc prac^ces from ins^tu^ons in your approach: country or region? 1. First contact • What are the speciUc areas for improvement? 2. Client visit 3. Loan appraisal PRODUCTS AND SERVICES List the diLerent types of products and services 4. Loan approval in a matrix similar to the one below. Consider graphing the growth of each product over ^me 5. Disbursement and try to understand the ra^onale for each 6. Arrears monitoring. product oLering (that is, does it target a speci'c market? Or does it serve a dierent need?) - 91 - Agricultural Lending: A How - To Guide CharacterisCc Product 1 Product 2 Product 3 Product 4 Outstanding Por1olio Number of Loans Outstanding Loan size Average, Minimum, Maximum Loan Term Average, Minimum, Maximum Interest Rate Nominal, Monthly Fees Compulsory Savings Other Fees Type of Guarantees Other Requisites BRANCH STRUCTURE AND the key reports used and generated by the loan ACTIVITIES oCcers? How do they monitor performances? How do they track disbursements and arrears? Map out the organiza^onal structure of the branch. MANAGEMENT INFORMATION Branch Manager: What are the main func^ons SYSTEMS (MIS) and responsibili^es of the branch manager? How eCciently are the loan tracking systems How does the branch manager enforce lending working? Are the reports generated from the policies? What are the key reports the branch system adequate to monitor performance? manager uses to track loan oCcer performT Does each layer within the organiza^on have ances? What are the key reports the branch the necessary informa^on to manage their manager uses to report performance to areas? What is the minimum amount of headquarters? What are the key reports to informa^on needed to manage in an op^mal track arrears? manner? Does the system track preTdisburseT Loan O%cer: What are the main func^ons and ment and postTdisbursement processes? Who responsibili^es of the loan oCcers? What are is responsible for inpung data in the MIS? - 92 - APP6)DI ORGANIZATIONAL EFFECTIVENESS Year 1 Year 2 Percentage Change StaL Reten^on Rate Ra^o of Direct to Indirect StaL Incen^ves as a Percent of Salary Quit Rate Termina^on Rate LayoL Rate INTERNAL AUDIT people with skills and knowledge needed by the organiza^on? • Are policies and procedures for key func^onal ac^vi^es such as credit, • CostTeLec^veness—how costTeLec^ve is a accoun^ng, and Unance in place? given policy in terms of wages, salaries and produc^vity? • Are these policies clearly communicated and understood? • Congruence—what level of congruence do HR policies generate or sustain between • Are these policies updated and if yes, how management and employees? o-en? Human Resources Audit: The main purpose of • What is the process used to update policies the audit is to evaluate the eLec^veness of the (how is feedback solicited and docu( organiza^on’s human resource func^on. It mented?) should show both the department’s strengths • What controls does the organiza^on have and weaknesses and provide management in place to prevent fraud? Has fraud with a clear picture of the department’s role in occurred before? If yes, when and a-er the organiza^on and the following: how long before was it detected? • Understand turnover: quit rate, terminaT ^on, layoL, reten^on, re^rement, length of HUMAN RESOURCES service, absence, over^me, posi^on (Recruitment, Training, and Incen6ves): vacancy, training and development and grievance rate. • Commitment—to what extent do HR policies enhance the commitment of your • Understand personnel policies: salary and people? beneUts package, supervisory prac^ces, job design, and re^rement plan components. • Competence—to what extent do HRM policies a2ract, keep and/or develop - 93 - Agricultural Lending: A How - To Guide INDUSTRY AND COMPETITOR ANALYSIS Marketplace Analysis QuesCons Year 1 Year 2 Percent Change Market share vs. Total market Market share vs. Top 5 FIs Ang. Annual Loan Payment Over Per Capita GDP Legal and Regulatory Environment Analysis • What laws govern the introduc^on of agricultural lending? • Are there interest rate ceilings on lending products in this sector? • Are there limita^ons on the amount or types of collateral that can be used when lending to rural popula^ons? • Does the government subsidize this sector or have any guaranteed purchasing systems in place? CompeCCve Analysis Summarize below the results of your regional analysis and your research on other banks and FIs oLering agricultural lending products. ............................................................................................................................... .......................... ............................................................................................................................... .......................... ............................................................................................................................... .......................... ............................................................................................................................... .......................... ............................................................................................................................... .......................... ............................................................................................................................... .......................... - 94 - APP6)DI MARKET DEMAND AND SEGMENTATION ANALYSIS Market Demand Summarize below the results of your research with target clients, including key learnings and speT ciUc recommenda^ons. ......................................................................................................................................................... ......................................................................................................................................................... ......................................................................................................................................................... ......................................................................................................................................................... MARKET DEMAND AND SEGMENTATION ANALYSIS Market Demand Summarize below the results of your research with target clients, including key learnings and speciUc recommenda^ons. ............................................................................................................................... .......................... ............................................................................................................................... .......................... ............................................................................................................................... .......................... ............................................................................................................................... .......................... - 95 - Agricultural Lending: A How - To Guide Appendix 6 – ample Producer egmentation Interview orm ObjecCve of the meeCng To be2er understand the characteris^cs, produc^on strategies and challenges faced by producers in the region. The objec^ve of the mee^ng today is to discuss farmer Unancing needs related to produc^on, postTharvest, and marke^ng. This survey will enable the FI to design adequate Unancial products for farmers based on their cash .ows and risk proUles. 1. ProducCon characterisCcs of the region: a. What are the main crops produced in this region? Crops Area Produced/Heads Volume Produced b. Which months of the year are high season and low season and which (crops/livestock) are produced during those months Crops High Season !Months# Low Season !Months# 2. Demographics a. Farmer’s Name: .................................................................................................................. b. Gender: ............Male ............Female c. Region, Province, and Village: ............................................................................................. d. Type of Economic Unit: .......Family .......Partnership .......Coopera^ve .......Other - 96 - APP6)DI e. Land: .................Owned Owner/Land Title:..............................................................Rented f. Total Area Farmed: .........Own land: .........Rented land: ......... (include measurement, for example Hectares) g. Irriga^on access: .........Yes Type:......................................................................................No h. Number of Paid Employees (Temporary): .................Employees (Permanent): ................... i. Family working (Temporary): ..........................Family working (Permanent):......................... j. How many farmers are in this village/district/region? ............................................................................................................................... .................... k. How do you deUne small, medium, and large farmers in the region Small Farmer: ............................................................................................................................ ............................................................................................................................... .................... Medium Farmer: ........................................................................................................................ ............................................................................................................................... .................... Large Farmer: ............................................................................................................................. ............................................................................................................................... .................... l. Distribu^on of type of farmer by size in this region EsCmate numbers of farmers Type of farmers % of total farmers in the region Small Medium Large Total # Farmers 3. What are the main producCon challenges producers face in this region? ............................................................................................................................... ........................... ............................................................................................................................... ........................... 4. What are the nancing needs to improve your producCon? ............................................................................................................................... ........................... ............................................................................................................................... ........................... - 97 - Agricultural Lending: A How - To Guide 5. What are the yields in this region for the main crops Crops Minimum Yield Average Yield Maximum Yield 6. Assets DescripCon Units Price per Unit Sub(Total !$# Agricultural Inventory Seeds, Fer^lizers, Crop Stored Livestock Animals Fixed Assets Farm, Machinery, Infrastructure TOTAL ASSETS - 98 - APP6)DI 7. Farm Income a. Crops Seasonal Income/Agricultural Produc5on Volume in the Last 12 Months (Cash Flow Analysis) Crop HA ProducCon/ Family ProducCon Price/ Income Dates MarkeCng Units ConsumpCon Sold Unit Sold Channel Total b. Livestock Income Last 12 Months MarkeCng Type of Animal Units Sold Price/Unit Income Date Sold Channel Total c. Other Monthly Income: Ac5vi5es in the Last 12 Months (Specify The Calendar Months) AcCvity Units Unit Price Total Frequency Net Income / Income !Daily, Weekly, Monthly Monthly# TOTAL INCOME: - 99 - Agricultural Lending: A How - To Guide 8. ProducCon Costs a. Crop Produc5on Costs/Crops During the Year Type of Inputs Units Unit Cost Total Cost Date Seedlings/Plants Soil Prepara^on Plan^ng Fer^lizer Pest Control Labor Plan6ng Weeding/Pruning Harves6ng Transporta^on/Package Others Total b. Animal Produc5on Cost/Monthly Expenses Type of Inputs Units Unit Costs Total Costs Monthly Costs/ or Date if Seasonal Animals / DOC Feeding Minerals Health Control Employees Electricity Water Others Total - 100 - APP6)DI c. Family Expenses Family Expenses Monthly Seasonal Food Educa^on Transport Electricity/Gas Water Mobile Phone Clothing Health Recrea^on/Family events Help Family Members Fes^vals Others TOTAL 9. Access To Financial Services a. Which are the best known nancial ins5tu5ons in the region? Name of InsCtuCon What They Are Known For: b. Previous experience with other banks, FI, or others / last 5 years Amount Loan Interest Name of Lender Use of the Loan Guarantees Requested Term Rate - 101 - Agricultural Lending: A How - To Guide c. Sa5sfac5on level with nancial services/most recent loan: Name of the Ins^tu^on ....................................................................................................... What did you like the most from this ins^tu^on? ............................................................... Overall are you sa^sUed with the services received? .........Yes .........No What other Unancial services do you use? .........Savings .........Currency Exchange ......... Checking Acct ......... Remi2ances .........Payment U^lity Services .........Other: ............................................................ 10. Financial Demand a. What is your vision for the next 35 years regarding business expansion? ............................................................................................................................... ........................... ............................................................................................................................... ........................... b. Financial Needs Installment Frequency Ideal Dates Amount Loan Installment Use of Loan (Monthly, BiMonthly, for Requested Term Amounts Quarterly, Semester, Yearly) Payments c. Available Sources of Guarantee ..........Mortgage ..........House Furniture ..........Guarantors ..........Business Assets ..........Vehicles ..........Animals ..........Jewelry ..........Other:................ d. Please men5oned the best way to market the products in your region? MarkeCng OpCons Yes/No Mee^ng with Farmer’s Associa^ons Direct Visits to the Farm Mee^ng with Community Leaders Mee^ng with Local Collectors Radio/Program/Time Mobile Phone/SMS TV/Program/Time Wri2en Press THANKS FOR YOUR TIME - 102 - APP6)DI Appendix  – Competitive Position Analysis When inves^ga^ng your compe^^ons’ agricultural lending products, take note of the “Seven Ps”: Product CompeCtor 1 CompeCtor 2 CompeCtor 3 Product Minimum Amount Maximum Amount Repayment Period Repayment Flexibility Collateral Requirements Grace Period SpeciUc QualiUca^on Criteria Other Requirements Price Interest Rate Loan Appraisal/Processing Fees Penalty Charges Other Fees PromoCon Marke^ng/Informa^on Dissemina^on Adver^sing Place Branch Loca^on Slogan/Branding Corporate Image Product Image StaL Quality People Personnel Involved in Process Process Loan Applica^on Documenta^on/RequireT ments Loan Processing Time Physical Environment Branch Condi^on Layout - 103 - Agricultural Lending: A How - To Guide Appendix G – armer egmentation Analysis Cassava Farmers in Cambodia CharacterisCcs of the Communes Interviewed Pailin Trang O’Rumdoul Cassava, Corn, Cassava, Corn, Cassava, Corn, Main Crops Soybean Soybean, and Rice Soybean HA Produced 800 HA 5,000 HA 350 HA HA of Cassava 85% 75% 85% # of Farmers 300 1,865 100 Types of Farmers Pailin Trang O’Rumdoul # of Farmers 300 1,865 100 Farmer type Small: < 3 HA 20% 5% 60% Medium: 4 – 7 HA 40% 70% 35% Large: > 7 HA 40% 25% 5% Main Challenges of ProducCon Pailin Trang O’Rumdoul Access to water, when is dry it Access to water Access to water becomes dryer compared to other regions Access to credit Access to credit Poor quality of seedlings Low technical level of farmers Low technical level used by farmers Deep water is high in calcium Use of tractor is expensive - 104 - APP6)DI ComparaCve Advantages of the Region Pailin Trang O’Rumdoul Fer^le soil, less use of Good quality of soils Highland, less pest problems fer^lizers Close to Thai border, strong Good yields for cassava demand and good prices Cassava is pest resistant Cassava Farmers General InformaCon LARGE MEDIUM SMALL Farm size > 7 HA 4 – 7 HA < 3 HA Village Kamreng Soun Pou Leck Kandal Area Owned 13 HA 5 HA 3 HA Area Rented 10 Ha 0 HA 0 HA Temporary Employees 40 12 8 FullTTime Employees 3 0 0 Assets/Cassava Producers – Figures !$# LARGE MEDIUM SMALL 2. ASSETS CURRENT ASSETS Agricultural Inventory Working Capital 7,000 10 kt 313 Livestock Cows Chicken Sub Total Current Assets 7,000 T 313 FIXED ASSETS Spraying machines 4 400 1 94 - 105 - Agricultural Lending: A How - To Guide LARGE MEDIUM SMALL Tractor 1 12,000 Car 1 6,500 Motorbike 2 3,200 1 2,100 1 1,200 Trucks 1 20,000 1 15,625 Farm land 10 Ha 120,000 5 Ha 35,266 3 Ha 16,875 House 1 35,000 1 22,500 1 2,500 Residen^al plot 1600 3,125 SubTotal Fixed Assets 190,600 81,991 23,794 TOTAL ASSETS 197,600 81,991 24,106 LIABILITIES 3,000 2,500 313 EQUITY 194,600 23,794 Last 12 Months/Cassava Farm and Family Income !USD# LARGE MEDIUM SMALL 3. Farm Income 3.1. Crops / selling date Cassava DecTJan 20 Ha 24,375 3.5 ha 6,250 3 Ha 5,625 Corn / JulT Dec 2,571 1.5 ha 2,188 Soybean 3.2 Livestock / Selling date cow/carabao rental Total Farm Income 26,946 8,438 5,625 LARGE MEDIUM SMALL 4. ProducCon Costs Total ProducCon Costs 12,126 2,663 2,188 - 106 - APP6)DI LARGE MEDIUM SMALL NET INCOME FARM 14,820 5,775 3,438 Family Members 3 4 5 Other Yearly Income Salaries / spouses Motobike Taxi 1,519 Trucking Other Yearly Income 0 0 1,519 Net Farm Income + 14,820 5,775 4,957 Other Income % Farm Income / Total family 100% 100% 69% Income Family Expenses 3,600 1,320 1,500 Disposable Income / Year 11,220 4,455 3,457 Yearly Cash(Flows/Cassava Producer Yearly Cash flow Cassava Producer / Figures in USD 20,000 15,000 10,000 Cassava Com 5,000 Non Farm Income Production Costs - Family Expenses Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec (5,000) (10,000) - 107 - Agricultural Lending: A How - To Guide Final Risk Analysis ( Large Cassava Producer Risk ProUle: Med • Has low crop diversiUca^on and seasonal incomes • Good agricultural prac^ces and good yields • Region has good climate and cassava is pest resistant, reducing risks • Strong demand from Thailand and good prices • Demand also to process dry cassava. Financial Demand Cassava Farmers in the Three Communes Variables Large > 7 HA Medium: 4(7 HA Small: < 3 HA Loan Amount 15,000 5,000 1,500 Use Build rooms for rent Diversify to Longan 1 HA Working Capital Loan Term 3 years 3 years 1 years Payment Plan 1 payment / year Yearly payment Yearly payment Collateral Farm Farm Farm Percentage of Farmers 40% 40% 20% by Size Number of Farmers 591 1,461 213 Target 30% = 177 Farmers 30% = 438 Farmers 30% = 64 Farmers Average Loan Amount $15,000 $5,000 $1,500 Por1olio $2.65 million $2.19 million $ 96,000 - 108 - APP6)DI Appendix H – Loan Appraisal orms and 6xpert core ariables The detailed forms contained in this sec^on comprise IFC’s agricultural lending tool and methodology discussed in Phase 3 of this guide. LOAN APPLICATION FORM Application No. Date Membership No. A. APPLICANT INFORMATION 1. First Name 2. Last Name 3. ID Number 4 .Gender 5. Birthdate 6. Age 7. Experience in the business 8. Time operating current farm 9. Civil Status 10. House ownership 11. Number of family members 12. No.Dependents 13. Education level 14. Phone No Home Phone Handphone 15. Home Address 16. Location (village, sub-district, district) 17. Type of Farm/Business 18. Farm / Business Address 19. List main sources of income Activities Land Area / No of Livestock B. COSIGNER INFORMATION 1. Name 2. Address if different 3. ID No. 4. Birthdate 5. Age - Year 6. Pekerjaan 7. Nama Usaha 8. Alamat Usaha 9. No. Handphone 10. Net Income /month 11. Position 12. Years in the Co Year C. GUARANTOR INFORMATION 1. Name 2. Address if different 3. ID No. 4. Birthdate 5. Age - Year 6. Activity 7. Name of Employer 8. Work Address 9. No. Handphone 10. Net monthly income 11.Position 12. Years in the Co. Year Date Time Credit Officer Applicant Signature - 109 - Agricultural Lending: A How - To Guide FARM INCOME AND PRODUCTION COSTS Farm Income (Last Year) A. Last Year Yields and Income (Crops produced and harvest in the last 12 months) Estimated Yields Crops Cultivated Area Units Weighted Total Yield Production / Ha Date Last Min Max Projected Farm Income B. Projected Farm Income next Cycle (During the loan duration) Total Selling Price Family Weighted Crops Cultivated Area Units Total Prod % Losses Production Total Income Date consumption Sold Last Min Max Total Yield TOTAL INCOME C. Income / Stored Crops (during the duration of the loan) Selling Price Crops Volume Sold Units Weighted Total Yield Total Income Date Last Min Max TOTAL INCOME TOTAL INCOME/CYCLE DISTRIBUTION CHANNEL Main Buyers Volume Sold / Cycle Income / Cycle % of sales on Credit Duration of Credit TOTAL Main Risks of the Farm How you manage and mitigate those risks CROP PRODUCTION COSTS Crop 1 Crop 2 Crop 3 AGRI INPUTS Cultivated Area Cultivated Area Cultivated Area Date Units Rp / Unit Total Costs Unit Rp / Unit Total Costs Units Rp / Unit Total Costs Seed / Seedlings Fertilizers Pesticides Other Inputs/Material Sub Total TOTAL AGRI INPUTS LABOR COSTS Crop 1 Crop 2 Crop 3 LABORS Cultivated Area Cultivated Area Cultivated Area Date Units Rp / Unit Total Costs Unit Rp / Unit Total Costs Units Rp / Unit Total Costs Land Preparation Crops Mantainance Harvest/Post Harvest Sub Total TOTAL LABOR COSTS - 110 - APP6)DI SERVICES Crop 1 Crop 2 Crop 3 SERVICES Cultivated Area Cultivated Area Cultivated Area Date Units Rp / Unit Total Costs Unit Rp / Unit Total Costs Units Rp / Unit Total Costs Sub Total TOTAL SERVICES COSTS OPERATIONS Crop 1 Crop 2 Crop 3 OPERATIONAL ACTIVITIES Cultivated Area Cultivated Area Cultivated Area Date Units Rp / Unit Total Costs Unit Rp / Unit Total Costs Units Rp / Unit Total Costs Sub Total TOTAL OPERATIONS COSTS TOTAL PRODUCTION COSTS Crop 1 Crop 2 Crop 3 ACTIVITIES Cultivated Area Cultivated Area Cultivated Area Production Costs / Crop TOTAL PRODUCTION COSTS TECHNICAL LEVEL FARMER Component Farmer Data (Survey) Years of Experience (years) Any crops being produced for 1st time? Use of Certified Seed Apply Phosphate Fertilizar Amount of Nitrogen applied When do you apply pesticides Crops Conditions SUMMARY FARM AND FAMILY INCOME AND PRODUCTION COSTS Total Farm Income during the duration of the loan Total Farm Income Income / Stored Crops Others Farm Income TOTAL FARM INCOME Production Costs Total Inputs Labors Services Operations TOTAL PRODUCTION COSTS NET FARM INCOME Other Income and Household Income / Year Total Salaries & Business Family Expenses Current Debt Payment DISPOSABLE INCOME FARM & FAMILY Diversification of Household Income OTHER INCOME AND FARM EXPENSES FAMILY EXPENSES Members living in the House 5 Number of Member that work 2 Family expenses Monthly (Rp) Seasonal (Rp) Date / Month Food Rent Education Electricity, gas, water Transport Health and recreation Clothing Mobile phone/Internet/cigarret Family events / Social Savings / Debt payment Months Total / Month Family Expenses per Year Other Off farm Family Income Other Stable Income Conservative Estimate Details Other Income Type of Business Inventory Gross Income Margin Net Off Farm Income TOTAL FAMILY INCOME / Monthly ( Salary + business) Months Total FAMILY INCOME / Yearly (Salary + business) Calculations / Observations Loan Term Amount Loan requested by Client Interest / Year (month) Installment Use of the Loan Freq/Year Install Amount Provide details of loan use If the production fails, how could you pay back the loan? - 111 - Agricultural Lending: A How - To Guide FARMERS CHARACTER ASSESSMENT Farmer Data Cooperation in providing information Accuracy of information provided Does the producer keeps detailed records of performance Farm General Apperance Personal References Income Diversification Ratio of the Family Income Diversification Ratio of the Family Farmer Data Family Income Diversification Cash flow Frequency Installment frequency INVESTMENTS, FIXED ASSETS, AND LAND A. BALANCE SHEET AND ASSETS CURRENT ASSETS Institution Amount Cash Savings Checking Accounts Others TOTAL ASSETS ACCOUNT RECEIVABLES Main Clients Acc. Receivables Term Age Acc. Receivables Balance days days days TOTAL ACCOUNT RECEIVABLES B. FARM INVENTORIES Agriculture Quantity / Unit Unit Cost Value Crop Stored /Livestock Prod Quantity / Unit Unit Cost Value Other Inventory (Seeds, pesticides, Fertilizers, etc) Quantity / Unit Unit Cost Value TOTAL AGRICULTURE INVENTORY Livestock Quantity / Unit Unit Cost Value TOTAL LIVESTOCK INVENTORY TOTAL INVENTORIES - 112 - APP6)DI C. LOAN ASSESSMENT: FARM FARM FIXED ASSETS Farm Fixed Assets (Equipment, tools and cars) Description Quantity / Unit Unit Cost Value TOTAL FIXED ASSETS FARM FARM LAND SITE 1 SITE 2 SITE 3 SITE 4 Crop Development stage Area Cultivated (Ha) Land Ownership Rent ( Rp /year) Value of Owned Land/ Ha Payment Date SITE CONDITION % of area Irrigated Type of Soil Topography slope (%) Climate (# of dry season) Month Value of Land (Rp) Total Cultivated Area (Ha) Owned Land Value of Owned Land Rent Land Total Rent Paid / Year OTHER FIXED ASSEST (Off Farm or secondary business activities ) Description Units Unit Cost Value Amount LIABILITIES AND SUMMARY ASSESSMENT CROPS LOAN ASSESSMENT LIABILITIES FARM LIABILITIES Original Monthly Institution Use Frequency Balance Term Contact person Phone # Amount Installment < 12 Month > 12 Month TOTAL LIABILITIES/MONTH SEASONAL INSTALLMENTS Date - 113 - Agricultural Lending: A How - To Guide TOTAL HOUSEHOLD LIABILITIES Original Monthly Institution Use Frequency Balance Term Contact person Phone # Amount Installment TOTAL HOUSEHOLD LIABILITIES Month # Payments in the Loan Cycle TOTAL MONTHLY DEBT PAYMENT TOTAL DEBT PAYMENTS DURATION OF LOAN IDENTIFY THE COLLATERALS USED IN THE LOANS LISTED ABOVE Institution Original Amount Collateral Used SUMMARY BALANCE SHEET FARM Financial Information Farm Date 1 Cash & Account Receivable 12 Current Liability 2 Cash 13 Short term credit < 12 months 3 Banks 14 4 Account Receivables 15 5 Inventory 16 6 Agriculture 17 7 Livestock 18 Long Term Liabilities > 12 Months 19 8 Fixed Assets 20 9 Farm Fixed Assets 21 10 Farm Land 22 Total Liabilities 23 Equity 11 Total Assets 24 Total Liabilities + Equity Informasi Keuangan Rumah Tangga 25 Total Assets Family 27 Family Equity 26 Total Liabilities Family 28 Equity Family + Farm FINANCIAL RATIOS VARIABLE FARMER Liquidity Ratio Total Current farm Assets / Total Current Farm Liabilities Cumulative repayment capacity ratio (Disposible income + Loan) / (Loan + Interest expenses ) Debt ratio including the loan Total Debt including Loan / Total Assets Farm Operational Efficiency Operating Expenses / Revenue Ratio Loan to Value (LtV) Loan Amount / Value of Security - 114 - APP6)DI FINANCIAL RATIOS AND SCORE CREDIT COMMITTEE SUMMARY SHEET Client's Name Years of Exp Activity Loan Amount Requested FARM INCOME Financial Ratios Level Ideal Farmer Result Farm Income Liquidity Ratio Stored Crops Cumulative repayment capacity ratio Other Farm Income Debt ratio including the loan Total Income Operational Efficiency Loan to Value Ratio (LTV) Production Costs Inputs Farmer Risk Profile Score Weight Classification Result Labors Farm Conditions Services & Operations Technical Level Farmer Total Production Costs Crop Diversification Ratio Farm's Financial Strengh NET FARM INCOME Farmer's Character Salary and Business Farmers's Socio Economic Family Expenses Total Score Current Debt Payment Max Disposable Income FARMER RISK PROFILE PERCENTAGE RECOMMENDATION BALANCE SHEET FARM Very Low Risk Cash & Account Receivables Low Risk Inventory - Agriculture Medium Risk Inventory - Livestock High Risk TOTAL SCORE APPROVE Current Assets Land and Building Disp Income / year Cycles/year TOTAL ASSETS FARM Disp Income / Cycle Short Term Liabilities Long Term Liabilities Int rate interest / year Rekomendasi TOTAL LIABILITIES Max Loan Proposed TOTAL EQUITY FARM Load Proposed by LO Other Family Assets Other Family Liabilities Use of the Loan Family Equity If the production fails, how could you pay back the loan? Credit Committee Resolution Amount Approved Securities Loan Term Collateral Value Installment Frequency Type of collateral Installment Amount Securities Branch Manager Credit Officer SUMMARY FARM DATA FARM INCOME AND PRODUCTION COSTS Crop 1 Crop 2 Crops 3 Cultivated Area ha Cultivated Area ha Cultivated Area ha Total Total Total Production Production Production ITEM production ITEM production ITEM production Costs/ Ha Costs/ Ha Costs/ Ha costs costs costs Fertilizers Fertilizers Fertilizers Seed / Seedlings Seed / Seedlings Seed / Seedlings Pesticides Pesticides Pesticides Other Inputs/Material Other Inputs/Material Other Inputs/Material Inputs Costs Inputs Costs Inputs Costs Land Preparation Land Preparation Land Preparation Crops Mantainance Crops Mantainance Crops Mantainance Harvest Harvest Harvest Labors Costs Labors Costs Labors Costs Soil preparation Soil preparation Soil preparation Other Services Other Services Other Services Services Costs Services Costs Services Costs Rental Land Rental Land Rental Land Operational Costs Operational Costs Operational Costs Total Production Sold Price per unit Total Income Total Income Total Income Total Costs Total Costs Total Costs Net Farm Income Net Farm Income Net Farm Income - 115 - Agricultural Lending: A How - To Guide OTHER HOUSEHOLD EXPENSES Expenses Monthly Yearly Family expenses Current Debt Payment Total OTHER HOUSEHOLD INCOME Income Monthly Yearly SCORE CARD I. Farm Conditions Data Farmer Score Max 1 Total Area Cultivated 2 Land Owenrship 3 % of area Irrigated 4 Type of Soil 5 Topography slope (%) 6 Climate (# of dry season) II. Technical Level Farmer 1 Years of Experience (years) 2 Any crops being produced for 1st time? 3 Use of Certified Seed 4 Apply Phosphate Fertilizar 5 Amount of N applied 6 When do you apply pesticides 7 Crops Conditions III. Crop Diversification Ratio 1 Family Income Diversification Ratio 2 Cash Flows Frequency Ratio 3 Installment Frequency IV. Farm's Financial Strengh 1 Liquidity Ratio 2 Cumulative repayment capacity ratio 3 Debt ratio including the loan 4 Operational Efficiency 5 Loan to value (LtV) V. Farmers' Character 1 Cooperation in providing information 2 Accuracy of information provided 3 Does the producers keeps detailed records of performan 4 Farm General Appereance 5 Personal References VI. Farmers's Socio Economic 1 Gender 2 Age 3 Civil Status 4 # of Household Members 5 # of Members contribute Financially 6 Education level 7 Ownership of House Score Weight Classification Result 1 Farm Conditions 2 Technical Level Farmer 3 Crop Diversification Ratio 4 Farm's Financial Strengh 5 Farmers' Character 6 Farmers's Socio Economic Risk Level farmer Loan Amount Reccomended - 116 - APP6)DI SCORE CRITERIA No Item Criteria Score 1. Sheet Clients & Data Male 1 1 Gender Female 4 < 24 Years 1 < 32 Years 2 2 Age < 40 Years 3 < 50 Years 4 Single 1 Married 4 3 Civil Status Divorced 2 Widow 2 < 2 Persons 4 <= 5 Persons 5 4 Number of family members <= 6 Persons 3 <= 8 Persons 1 1 Person 1 2 Person 2 5 Jumlah Anggota Keluarga yang bekerja 3 Person 3 4 Person 4 None 1 Primary 1 6 Educa^on level Secondary 2 High School/Technical 3 University/College 4 Owned 4 7 House Ownership Rent 1 Working Capital 8 Tujuan Pembiayaan Investment 2_Sheet Inv, Fix Ass and Land < 1 Ha 1 1 T 3 Ha 2 1 Cul^vated Land 3 T 10 Ha 3 > 10 Ha 4 - 117 - Agricultural Lending: A How - To Guide No Item Criteria Score Owned 4 2 Land Ownership Rent 1 No irriga^on 1 < 50% 2 3 % of area Irrigated 50 T 75% 3 > 75% 4 Stony/Sandy 1 Clay hard 2 4 Type of Soil Clay so- 3 Loam 4 Flat 4 Slope < 10% 3 5 Topography slope % Slope < 20% 2 Slope > 20% 1 Dry season < 2 months 4 6 Climate # of dry season Dry season 3 T 4 months 2 Dry season > 4 months 1 3. Sheet Crop Income & Costs < 1 year 1 1 T 3 years 2 1 Years of Experience years 3 T 6 years 3 > 6 years 4 Yes 1 2 Any crops being produced for 1st ^me? None 4 Never 1 3 Use of Cer^Ued Seed Some^mes 2 Always 4 Never 1 4 Apply Phosphate Fer^lizar Some^mes 2 Always 4 Minimum 1 5 Amount of N applied Adequate for average yield 2 Adequate for good yield 4 Never 1 6 When do you apply pes^cides Only if there's infesta^on 2 Preven^on 4 - 118 - APP6)DI No Item Criteria Score Poor 1 Moderate 2 7 Crops Condi^ons Good 4 Good 3 Excellent 4 4. Liab & Summary <1 1 1 Liquidity Ra^o 1 T 1,5 3 > 1,5 4 < 1,3 1 2 Repayment capacity ra^o 1,3 T 1,5 3 > 1,5 4 > 60% 1 3 Debt Ra^o including the loan 30 T 60% 3 < 30% 4 > 60% 1 4 Opera^onal ECciency 55T60% 3 < 55% 4 > 70% 1 5 Loan to value 50T70% 3 < 50% 4 5. Liab & Summary <1 1 1 Liquidity Ra^o 1 T 1,5 3 > 1,5 4 < 1,3 1 2 Repayment capacity ra^o 1,3 T 1,5 3 > 1,5 4 > 60% 1 3 Debt Ra^o including the loan 30 T 60% 3 < 30% 4 > 60% 1 4 Opera^onal ECciency 55T60% 3 < 55% 4 > 70% 1 5 Loan to value 50T70% 3 < 50% 4 - 119 - Agricultural Lending: A How - To Guide Appendix I – ample Performance ,eports NUMBER OF LOANS DISBURSED Number of Loans Name of Number of Loans Percentage Actual vs. Disbursed per Loan Branch Loan Disbursed from Total Dis( Target O%cer O%cer bursement Target Actual Target Actual LOAN AMOUNTS DISBURSED Amounts of Name of Amounts of Actual Percentage Average Loans Disbursed Branch Loan Loans Disbursed vs. from Total Loan Size per Loan O%cer O%cer Target Disbursement Target Actual Target Actual GROWTH PERCENTAGE Loans Loans Name of Loans Disbursed Disbursed Disbursed Percent Change Branch Loan per Loan O%cer Month 1 Month 2 O%cer Number $ Number $ Number $ Number $ - 120 - APP6)DI PORTFOLIO OUTSTANDING Number of Loans Name of Loan Porolio Outstanding Percentage Branch Disbursed per Loan O%cer O%cer Di erence Target Actual Target Actual OUTSTANDING PORTFOLIO IN ARREARS AND AT RISK Name 1(15 16(30 61(90 91(180 180+ Principle Days Days Days Days Days Total Arrears of Loan Outstanding Arrears % O%cer No. $ No. $ No. $ No. $ No. $ LOAN OFFICER PERFORMANCE IN CREDIT COMMITTEE (CC) Total $ Requested for Total $ Loan No. of Loans No. of Loans All Loans By Branch Approved O%cer Submied to CC Approved by CC Client Loan O%cer - 121 - Agricultural Lending: A How - To Guide elected ibliography Access to Finance for Smallholder Farmers: Buchenau, J. and R. 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Agriculture Value Chains: Access to Finance United States Agency for Interna^onal DevelT Global AgriUnance Advisory Program. InternaT opment. September 2014. ^onal Finance Corpora^on. - 122 - Contact: Hans Dellien Huong Mai Huynh Financial Institutions Group, East Asia & Pacific Financial Institutions Group, East Asia & Pacific Indonesia Stock Exchange Building, Tower 2, 9th Floor, 63 Ly Thai To Str. Jl. Jend. Sudirman Kav. 52-53 Hoan Kiem Dist. Jakarta 12190, Indonesia Hanoi, Vietnam Phone: +62-2129948068 Phone: +84-4-38247892 Website: www.ifc.org